Friday, August 5, 2011

Ilargi: In Wednesday's The Next Bank Bailout Bloodbath is Here, I gave you an overview of my fictional Google Finance portfolio. For your viewing pleasure, here's the follow-up graph after yesterday's close:

Isn't she lovely? Then on the present: $2.1 trillion in market value was wiped off the MSCI All Country World Index this week as of Thursday's close, write Leika Kihara and Pedro Nicolaci Da Costa for Reuters. Clearly, most of that was lost in Europe and the US, and most of that in turn in the financial sector. So it's no wonder that there's high level political talks going on today between Germany, France, Spain and other EU members.

But what can they realistically do? You can bet they know they can't do much at all at this stage in the game. They may not come out and say it in so many words, but that isn't even necessary anymore either. The non-political side of the table, in the shape of the European Central Bank, has made a clear enough statement already.

The ECB went back into the bond markets yesterday, but where everyone expected them to buy Italian and Spanish debt, since both these countries see interest rates on their debt skyrocket, the ECB bought only Irish and Portuguese paper.

And while this may be temporary, and the bank might start buying Italy and Spain bonds soon, first: that's not too likely given the circumstances, second: it's wouldn't make one iota of real difference, and third: the statement has been made regardless.

There are a lot of 'experts' in the press today who don't understand this, or won't. Which strikes me as odd, since the dice have come up as they have, and it's no use debating the outcome.

From the Leika Kihara and Pedro Nicolaci Da Costa piece cited above:

Investors had hoped the ECB would target Spanish and Italian debt in reviving its bond-buying stimulus program, but it restricted the purchases to Irish and Portuguese securities, not Italy's or Spain's.

Roberto Perli, managing director at ISI Group and a former staffer at the Federal Reserve, called the ECB's action "mysterious." "It sent the wrong message," he said.

Ilargi: The message may have been "wrong" and "mysterious" to Mr. Perli, or maybe he's just saying that, but I think it's crystal clear, and yes, even unusually brave for the institution, for any such institution, really.

Ambrose Evans Pritchard has his own views, and quotes Willem Buiter to boot:

The European Central Bank has abandoned Italy and Spain to their tortured fate.

Its refusal to act in the face of an existential threat to monetary union has set off violent tremors across the global financial system, raising the risk that the crisis will spiral out of control. [..]

Jean-Claude Trichet, the ECB's president, said the bank had purchased eurozone bonds for the first time since March but this token gesture was confined to Ireland and Portugal, countries that have already been rescued.

Professor Willem Buiter, Citigroup's chief economist, said the apparent ECB action was pointless. "The warped logic of intervening in two countries that don't need it is as strange as it gets."

Mr Buiter said Europe risks a disastrous chain of events and the worst financial collapse since the onset of the Great Depression unless Europe's central bank steps in with sufficient muscle to back-stop the system.

"The ECB has yet so show it understands that it is the only institution that can save Italy and Spain from fundamentally unwarranted defaults. Everybody is afraid and real money investors are dumping their holdings. The ECB must step in to cap the yields at 6pc or 6.5pc and put a floor under the market," he said.[..]

"As long as the ECB stays on the sidelines, a speculative, fear-driven withdrawal of market funding can feed a self-fulfilling insolvency. Any number of banks and insurance companies would take huge hits. The ECB will have to come in, or accept the biggest banking crisis since 1931," Mr Buiter said. He said the "fundamental design flaw" in economic and monetary union is the lack of a lender of last resort.

EU leaders agreed in late July to boost the powers of the eurozone's €440bn (£382bn) European Financial Stability Facility (EFSF) bail-out fund so that it may intervene pre-emptively in countries in trouble, but this has to be ratified by all national legislatures and may take months.

Mr Buiter said the fund needed to be increased five-fold to €2.5 trillion to be credible in the long run. "It is quite irresponsible that the euro member states decided to send their parliaments on holiday this summer before they had enhanced the EFSF to effective scope and size. Crises can happen even during inconvenient periods," he said. [..]

Ilargi: No, Willem Buiter. "The warped logic of intervening in two countries that don't need it is NOT as strange as it gets.". It is a loud and clear signal to the world that the ECB can not and will not try to save Italy (or Spain). Because it doesn't have the financial wherewithal to do so, let alone the political support.

As for: "The ECB has yet so show it understands that it is the only institution that can save Italy and Spain from fundamentally unwarranted defaults", no again. The ECB, unlike you, apparently, Mr. Buiter, understands it cannot save Italy and Spain.

Making the European Financial Stability Facility almost 6 times bigger (€440 billion to €2.5 trillion) than it isn't even yet, but is at least supposed to become, is a dead on arrival idea. Germany won't accept that, Holland won't, Finland won't.

Mr Trichet said the ECB's governing council was divided over bond purchases but gave no further details. German sources said Bundesbank chief Jens Weidmann voted against intervention, repeating his well-known view that further "collectivisation of risks" poses a threat to monetary stability. German-led hawks say the ECB lacks treaty authority to keep amassing a portfolio of bonds, is on a slippery slope towards debt monetisation and is being drawn deeper into tasks that belong to fiscal authorities.

ECB officials are aware token purchases of Spanish and Italian bonds would soon be tested by the markets, pulling the bank ever deeper into a monetary swamp. The two countries' tradable public debt is more than €2 trillion. The ECB has purchased almost a fifth of the combined debt of Greece, Ireland, and Portugal yet still failed to stem the crises in these countries. Any intervention in Italy and Spain would have to be on the sort of overwhelming scale undertaken by the US Federal Reserve.

"Italy is the third-biggest bond market in the world: the idea that a bit of ECB buying can make any long-term difference is very misplaced," said Marc Ostwald from Monument Securities. Mr Ostwald said the ECB appeared to have bought some Irish bonds today. "This is their way of giving Ireland a pat on the back for delivering on austerity, to show that Ireland really starts to divorce itself from others in crisis."

Ilargi: Mr. Ostwald has one thing right: " [..] the idea that a bit of ECB [bond] buying can make any long-term difference is very misplaced." indeed (that's what the ECB is letting us know). But he's wrong on the next point: Buying Irish bonds is not "their way of giving Ireland a pat on the back for delivering on austerity", it's instead - and quite plainly- their way of telling the markets that the ECB will not try and save Italy and Spain.

The reason why, apart from the fact that there is no European facility endowed with sufficient financial or political means to save those two, is certainly also plainly in the sheer size of the debt and the risks that come with it. "Italy is the third-biggest bond market in the world..” Also, as per Charles Forelle in the Wall Street Journal, "its economy is 50% larger and its debt volume two-and-a-half times as big as Spain's". And "just this month, Italy must repay €36 billion in government debt. That is roughly what Greece will redeem this entire year." As well as: "The IMF estimates that Italy's gross financing needs—the amount of money it must borrow to repay maturing debt and cover deficits—will run between €340 billion and €380 billion annually over the next five years.

A chunk of that is short-term debt that Italy would likely still be able to roll over—Greece continues to sell short-term debt despite its bailout—but medium and long-term debt redemptions next year alone are around €200 billion. Italy's budget deficit will be around €50 billion."

However bad the economic crisis in southern Europe may be for investors, it is proving lethal for the area’s political leaders. In March José Sócrates, Portugal’s beleaguered prime minister, resigned. Soon afterwards his Spanish counterpart, José Luis Rodríguez Zapatero, announced his intention to step down. In June George Papandreou, Greece’s prime minister, came close to ejection during a fierce debate over an austerity package.

So as he stood up to make the first of two eagerly awaited speeches to parliament on August 3rd, Italy’s prime minister, Silvio Berlusconi, may have had an uneasy feeling he was one in a line of dominoes. If so, there was nothing in the style or content of his address to suggest it. Nor was there much to indicate that he appreciated the magnitude of the crisis facing the euro or the case for drastic action to tackle it.

Many analysts argue that the euro’s difficulties are beyond resolution by any one member. But Italy is crucial. It is the biggest country on the euro zone’s troubled southern flank, and its €1.8 trillion ($2.6 trillion) borrowings dwarf those of any other country in the single currency."

Ilargi: British think tank CEBR (Centre for Economics and Business Research) is about as clear as can be, reports the BBC:

Debt-laden Italy is likely to default, but Spain might just avoid it[..]

With the countries weighed down by debt, the think tank modelled "good" and "bad" economic scenarios for both. It found that Italy will not avoid default unless it sees an unlikely big jump in economic growth. However, it said, "there is a real chance that Spain may avoid default".

Even though Italy has managed to run tight budgets, and has vowed to eliminate its deficit by 2014, the economy needs a significant boost in growth. But its economy grew by just 0.1% in the first quarter of 2011 and further growth is expected to remain sluggish.

[..] In a report published on Thursday, the CEBR calculated that Italy's debt would rise from 128% of annual output to 150% by 2017 if bond yields stay above the current 6% and growth remains stagnant. "Even if the cost of borrowing goes back down to 4%, the growth rate is so anaemic that we see the debt-GDP ratio remaining at 123% in 2018," said Doug McWilliams, the CEBR's chief executive.

The conditions in Spain are better because its debt is much lower. Even under the "bad" scenario, Madrid's debt ratio would climb to no higher than 75% of national output. "Fingers crossed but there is a real chance that Spain may avoid default and debt restructuring, unless it gets dragged down by contagion," Mr McWilliams said. "Realistically, Italy is bound to default, but Spain may just get away without having to do so," he said.

If the ECB refuses to even try and rescue Italy, and a major economic think tank bluntly states that it cannot be saved no matter what, I'm thinking that people like Roberto Perli and Willem Buiter have simply not caught up with reality. Not that I see Buiter admit to anything like it, mind you. People like him can argue until the end of time that if only, if only, if people would just have listened to them, things would have been much better.

It's like Paul Krugman or Robert Reich in the US: economists are people who cling to faith-based arguments, who in this case believe that if Europe or America would spend all of their children's money into a black hole of debt, those children would greatly benefit. It's all just conjecture, conveniently omitting facts like a few hundred trillion dollars in debt here and there. "If only we would spend, then we would certainly grow!". No, there is no such certainty.

What is certain is that the Economist list of European politicians in election trouble, José Sócrates, José Luis Rodríguez Zapatero and George Papandreou, will grow rapidly, and increasingly so. This would lead to additional problems in solving issues: whichever "leader" you talk to in a given country, may be gone tomorrow. Argentina in its early 2000's crisis had 5 different presidents in 2 months, or something along those lines.

That is the sort of volatility we will see come to Europe, in particular the Mediterranean, going forward. It'll be chaotic, volatile, and it will lead to a lot of societal unrest. But none of it will make the financial problems go away.

And that brings us to another theme I touched on in The Next Bank Bailout Bloodbath is Here, and arguably the most important one of all. Derivatives. Credit default swaps on PIIGS debt. Yes, there will be credit events, and so, yes, counterparties will demand payments. And since the majority of swaps have been issued by American institutions, these will either go belly-up or either the American government or the Federal Reserve must step in.

However, given the numbers -JPMorganChase's derivatives exposure is estimated at about $90 trillion- the Fed will in the end be as helpless and useless in this situation as the ECB is with regards to Italy.

If financials keep on losing stock value the way they have in the past few days, we are well on our way to bank holidays in some countries (Italian trading was temporarily halted yesterday). And where there are bank holidays, bank runs are not far behind: if people see the stock prices of their banks evaporate, why would they keep their money in them?

Yes, you can enjoy the relative calm provided by the US jobs report that wasn't as bad as feared, for a few hours today. But the U3 rate is still 9.1%. And no economy with that many jobless people will show substantial growth; it won't even be able to stand still to recover. And this bank rot won't go away by itself anymore. BofA and Citi are already losing 3% and 4% respectively again at 11 am EDT (UPDATE: make that 5.5% and 6.5% at 11.35 am. Yikes!) [UPDATE 2: each some 8% at noon].

The debt must be flushed, and we're not doing it. Here's hoping that the ECB reality check will wake up a few more people before present day policies cause entire societies to descend into chaos. But here's also thinking it's probably too late for that.

Debt-laden Italy is likely to default, but Spain might just avoid it, according to the British think tank, the Centre for Economics and Business Research.

With the countries weighed down by debt, the think tank modelled "good" and "bad" economic scenarios for both. It found that Italy will not avoid default unless it sees an unlikely big jump in economic growth. However, it said, "there is a real chance that Spain may avoid default".

Even though Italy has managed to run tight budgets, and has vowed to eliminate its deficit by 2014, the economy needs a significant boost in growth. But its economy grew by just 0.1% in the first quarter of 2011 and further growth is expected to remain sluggish. On Wednesday, Italian Prime Minister Silvio Berlusconi addressed parliament, saying the economy was "strong" and the nation's banks "solvent".

But many economists believe that the eurozone's third largest economy risks being engulfed in the debt crisis. In a report published on Thursday, the CEBR calculated that Italy's debt would rise from 128% of annual output to 150% by 2017 if bond yields stay above the current 6% and growth remains stagnant. "Even if the cost of borrowing goes back down to 4%, the growth rate is so anaemic that we see the debt-GDP ratio remaining at 123% in 2018," said Doug McWilliams, the CEBR's chief executive.

The conditions in Spain are better because its debt is much lower. Even under the "bad" scenario, Madrid's debt ratio would climb to no higher than 75% of national output. "Fingers crossed but there is a real chance that Spain may avoid default and debt restructuring, unless it gets dragged down by contagion," Mr McWilliams said. "Realistically, Italy is bound to default, but Spain may just get away without having to do so," he said.

The crisis must be bad: The European Central Bank has resumed its mothballed bond-buying program. After lying dormant for months, the ECB's Securities Markets Program sputtered into life Thursday to buy Irish and Portuguese bonds, but not Italian and Spanish bonds, which lie at the eye of the current storm and whose yields actually rose. But this latest capitulation drags the central bank into potentially dangerous territory.

The clamor for the ECB to buy bonds was inevitable once yields on Spanish and Italian government 10-year debt rose above 6%. The SMP was designed to intervene where dysfunctional markets threatened the normal monetary-policy transmission mechanism. That is clearly the case now. Higher yields have already caused bank funding to dry up, raising the specter of a credit crunch in the euro-zone periphery.

But the latest rise in yields isn't entirely irrational but a logical response to the decision to inflict losses on Greek bondholders. As a result, euro-zone government bonds now carry explicit credit risk. That is a major difference from a year ago and leaves the ECB, furious at what it considers to have been a "stab in the back," with a major problem. For the ECB to put its balance sheet in danger by buying bonds at risk of restructuring crosses the line into territory that rightly belongs to democratically accountable governments.

The ECB's explanation for its change of heart is unconvincing: It appears to accept the euro-zone leaders' assurances that Greece is a unique situation and that other states will honor their obligations—although it is worth noting that the bond-purchase decision wasn't unanimous. It also insists this is just an interim solution: The ECB wants euro-zone leaders to implement swiftly the decisions taken July 21 to make the European Financial Stability Facility responsible for secondary-market bond purchases.

But the ECB has received no indemnities from governments to cover losses on its latest purchases, nor has it received any guarantee that bonds will be transferred to the EFSF. That is a big risk; it is taking on trust that governments will deliver on their July 21 commitments, even though that deal carries major execution risks and fell far short of what was needed to end the crisis. In particular, euro-zone leaders failed to increase the size of the EFSF or move to joint and severally guarantee its bonds.

The market clearly doesn't share the ECB's faith in politicians, betting a euro collapse remains a possibility. ECB leaders should expect to be held personally accountable if this gamble fails and they end up saddling taxpayers with further losses.

China and Japan called for global cooperation on Friday after a financial market rout signaled fear that Europe's debt crisis could spin out of control and the U.S. economy may slide into another recession.

The comments from Washington's two biggest foreign creditors pointed to growing concern of contagion as Asian stock markets tumbled following Wall Street's steep dive a day earlier. European markets hit a 14-month low in early trading. French President Nicolas Sarkozy will discuss financial markets with German Chancellor Angela Merkel and Spanish Prime Minister Jose Luis Rodriguez Zapatero on Friday, Sarkozy's office said in a statement.

In Japan, Finance Minister Yoshihiko Noda said global policymakers needed to confront currency distortions, the debt crises and concerns about the U.S. economy. "I agree that these subjects should be discussed," he told reporters a day after Japan intervened to sell yen. "Each problem is important, but how to prioritize these issues is something to discuss from here on in."

Japan sold yen on Thursday to try to cap the currency's rise, which puts its exporters at a competitive disadvantage. There was market talk that it had intervened again on Friday, although the currency bounced back quickly, which suggests Tokyo was not in the market. The yen has become a popular safe-haven bet as concerns about the United States and Europe grow. China Foreign Minister Yang Jiechi said U.S. debt risks were escalating and countries should step up cooperation on global economic risks. Yang, who is visiting Poland, called on the United States to adopt "responsible" monetary policies and protect the dollar investments of other nations.

The U.S. Federal Reserve holds its next policy-setting meeting on Tuesday, and economists say there is little more it can do to try to spur growth. A flurry of weak economic data and Europe's debt woes have fed fears of a fresh recession, triggering Thursday's sell-off on Wall Street, which was the worst since the global financial crisis. Some $2.1 trillion in market value was wiped off the MSCI All Country World Index this week as of Thursday's close, Thomson Reuters Datastream showed, and that total looked set to rise on Friday as Asian and European stocks fell. IHS Global Insight said there was now a 40 percent chance the United States could slip into recession.

Japan and Switzerland are trying to reduce the allure of their markets as safe havens and after gold has more than doubled in price since the global financial crisis, many investors are having second thoughts about seeking refuge in the precious metal. With investment options running out, funds are flooding into cash. Bank of New York Mellon Corp said it had been overwhelmed with deposits, prompting it to charge some big customers a fee.

Investors slashed positions after the European Central Bank failed to include Italy and Spain in a fresh round of bond buying, even though yields on their debt shot above 6 percent, the highest level since the euro was launched over a decade ago. ECB President Jean-Claude Trichet said there was not full support in the central bank for the action, underscoring deep divisions within Europe over how to handle a debt crisis that has forced Greece, Ireland and Portugal to seek bailouts.

Investors worry that Italy and Spain, the euro area's third- and fourth-biggest economies, could be next. Sarkozy said France, Germany and Spain had talked to Trichet. U.S. officials from the Federal Reserve, the U.S. Treasury and the White House declined to comment on whether they were holding any discussions with European or Asian officials.

Investors had hoped the ECB would target Spanish and Italian debt in reviving its bond-buying stimulus program, but it restricted the purchases to Irish and Portuguese securities, not Italy's or Spain's. Roberto Perli, managing director at ISI Group and a former staffer at the Federal Reserve, called the ECB's action "mysterious." "It sent the wrong message," he said.

Belying a sense of crisis, many of Europe's policymakers are still on summer vacation, although EU Economic and Monetary Affairs Commissioner Olli Rehn broke away from his holiday to return to Brussels. He plans a news conference on Friday.

Longer term, some sort of supranational fiscal authority was needed, transferring some of the debt burden of troubled countries to the region as a whole, analysts said. That option is not seen as politically palatable to Germany and France now. Analysts said they would look to see if European leaders are willing to expand its emergency financial stability fund to an amount that would put a floor under the market panic. They say the fund, currently 440 billion euros, would need to be doubled or tripled to cover economies as big as Italy and Spain.

U.S. Problems Compound UncertaintyIn the United States, a similar sense of political paralysis reigns. Just days after a bitterly fought, last-minute deal to raise the country's debt ceiling and avoid default, realization has sunk in that many elements of the $2.1 trillion deficit reduction plan are short term and not locked in place. Doubt has spread through markets that Congress will stick to implementing it in full after the November 2012 elections.

This, combined with a bout of poor economic data, points to a heightened risk of another slump. Lawrence Summers, a senior adviser to the U.S. president until last year, argued in a Reuters column that there is a one in three chance of recession in the United States.

U.S. employment numbers will be critical to market sentiment. Forecasts are for a tepid 85,000 jobs added in July, but a weak number or even contraction would boost concern that the United States is heading into recession. The U.S. jobless rate has risen for three consecutive months, and another increase would send a strong recession signal, Goldman Sachs said. Many economists say chances are slim that Congress would endorse a further round of fiscal stimulus now that it is focusing on fiscal spending cuts.

"I don't see a well functioning government that can do something," said Jeff Frankel, economics professor at Harvard University and former White House economic advisor under Bill Clinton. "If everything is blocked politically, especially fiscal policy, there's nothing much you can do." Options for the Fed are also severely restricted. Policymakers appear reluctant to embark on another round of bond purchases, particularly given how controversial the last program proved to be.

Still, Fed Chairman Ben Bernanke has noted other options, such as bolstering its assurance that rates will stay low for an extended period. Nonetheless, few expect such efforts to have much of an impact, particularly since the economy's chief problem at the moment appears to be a lack of jobs, not credit. "The Fed has mentioned what their menu of tools is for easing, the problem there is several of them really have no significant macro economic benefit," said Michael Gapen, senior economist at Barclays Capital.

The US, Britain, and Europe are together embarking on a sudden and severe tightening of fiscal policy, in unison, before economic recovery has reached safe take-off speed. The experiment was last tried in the 1930s.

The theoretical model behind the austerity push – known as an "expansionary fiscal contraction" – is based on the work of German theorists, and more recently on studies by Harvard professor Alberto Alesina and a group of brave scholars willing to defy the canonical doctrine of post-war Keynesian economics. The Alesina view has been embraced by the European Central Bank and the budget cutters of the Eurogroup, but has enraged America's professoriat and set off a heated argument across the world.

Former US Treasury Secretary Larry Summers said there is now a one-third chance of a full-blown recession next year in the US. Nobel leaureate Paul Krugman said obscurantists had run amok. "What we're witnessing here is a catastrophe on multiple levels. We are doing a terrible thing. We are repeating all the mistakes of the 1930s, doing our best shot at recreating the Great Depression," he said.

Fear that a synchronized squeeze in half the global economy may go horribly wrong has seeped into market psychology, explaining why the $2.4 trillion (£1.5 trillion) debt deal agreed in Washington has failed to spark a relief rally. Wall Street is a step ahead, bracing for cuts in an economy that has already slipped to stall speed. Angst over faltering recovery explains why Italian and Spanish bonds have suddenly buckled. The European Commission said the spike in Latin spreads is "clearly unwarranted" given that Rome and Madrid are sticking to their austerity plans, but this misses the point.

Investors no longer see austerity as a solution if cuts go beyond the therapeutic dose and tip Italy and Spain back into recession, playing havoc with fragile debt dynamics. The US is expected to tighten by 2pc of GDP next year, including the expiry of payroll tax cuts and the phase-out of President Barack Obama's stimulus plan. Britain is tightening by 1.7pc this year and almost as much next year. Harsher versions are under way in Ireland and Club Med. Greece is retrenching by 16pc over three years. Canada, France and Germany will all tighten in 2012.

The International Monetary Fund said the combined effect is double the last sychronized squeeze in 1980. It comes as China is curbing credit to cool its property boom. The Alesina school cites a string of cases where fiscal cuts led to robust recovery, and a few booms. Their work cannot be dismissed lightly and exposes the limits of New Keynesian models, which often clash with historical reality and human behaviour.

The textbook cases are: Italy (1970s); Ireland, Denmark and Sweden (1980s); Canada, Spain and the UK (1990s). There were some flops, too: Finland (1970s), Australia, Belgium and Greece (1980s), and Italy (1990s). Context is crucial. Dr Alesina says one clear message comes through from the stack of evidence: "Tax increases are much worse for the economy than spending cuts."

A study by Goran Hjelm from Sweden's Institute of Economic Research said the formula only really works when countries can let their currencies slide and export their way out of trouble. This is not possible for Spain and Italy within EMU, nor for the combined West at the same time. "We can't all devalue together and export to Mars," said Jamie Dannhauser from Lombard Street Research.

Bank of England Governor Mervyn King has called for a "grand bargain" of the world's major players to ensure that the burden of rectifying global imbalances does not fall on debtors alone, which feeds a vicious circle. "The need to act in the collective interest has yet to be recognised. Unless it is, it will be only a matter of time before one or more countries resort to protectionsism. That could, as in the 1930s, lead to a disastrous collapse in activity around the world," he said.

Fiscal contractions work best in small countries where state spending gobbles up half of GDP and where confidence has already collapsed. Getting a grip creates a huge sense of relief. Bond yields fall far enough to offet fiscal pain.

This hardly applies to the AAA bloc today: Gilt yields are trading at post-war lows of 2.73pc, while 10-year US Treasuries are 2.57pc, German Bunds are 2.4pc and Japan's JGBs are 1pc. Central banks can do little to offset budget cuts when rates are already near zero, though £200bn of quantitative easing has cushioned the blow in the UK.

Britain had its own intriguing story during the Great Depression in 1932 when it passed a draconian budget, yet recovered well. The trick was to slash rates, devalue by a quarter and retreat behind imperial tariffs. But by then the international system had already collapsed.

Of course, rich nations may not have the luxury of spending their way out of trouble any longer. The Bank for International Settlements warned last year that fiscal woes are already near "boiling point" as demographics go from bad to worse and average public debt surpasses 100pc of GDP. "Current fiscal policy is unsustainable in every country. Drastic improvements will be necessary to prevent debt ratios from exploding," it said.

The indebted West is in a frightening bind: damned if it does, and equally damned if it doesn't.

Fears mounted Thursday the system sustaining Europe's debt crisis would collapse amid alarm Italy and Spain were sliding into debt that couldn't be bailed out. Italy and Spain -- the eurozone's third- and fourth-largest economies and the world's seventh- and 10th-largest -- opened the bond markets Thursday with borrowing rates near the 7 percent threshold that triggered bailout talks with Greece, Ireland and Portugal.

French and Belgian bonds opened after seeing volatile trading Wednesday. European Commission President Jose Manuel Barroso released a statement late in the day saying, "The tensions in bond markets reflect a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis." The euro area, or eurozone, includes the 17 European Union countries that use the euro as their common currency and sole legal tender.

Barroso called Italy and Spain's near-unprecedentedly high interest rates and weakening bond prices "a cause of deep concern." European banks own so many bonds issued by their home countries that they are being weakened as the value of those bonds falls. Barroso urged governments to signal "resolve to address the sovereign debt crisis with the means commensurate with the gravity of the situation."

Embattled Italian Prime Minister Silvio Berlusconi delivered an emergency address to Parliament late Wednesday, defiantly warning speculators they were wrong to bet against Italy. He rejected renewed calls for his resignation and vowed Italy would make no more budget cuts or new austerity plans, calling economic growth the country's best defense. "We have sound economic fundamentals," he said.

Italy's $2.2 trillion debt burden is more than that of the United States, compared with the size of its economic output, but its annual budget deficit is 4 percent, The Washington Post reported. Before Berlusconi spoke, Italian Finance Minister Giulio Tremonti, with whom Berlusconi has engaged in public battle, huddled with Jean-Claude Juncker, president of the Euro Group of eurozone finance ministers, in Luxembourg to discuss Italy's intensifying debt crisis.

Spanish Prime Minister Jose Luis Rodriguez Zapatero rushed back to Madrid Wednesday within hours of beginning his August vacation -- after postponing it Tuesday -- for emergency meetings with Spanish and European leaders about Spain's increasingly desperate situation. Spain was to sell as much as $5 billion in short-term sovereign bonds Thursday, and the European Central Bank was to meet in Frankfurt to discuss the crisis.

Switzerland's central bank stunned markets Wednesday with a surprise attempt to devalue its popular safe-haven franc because it said it was "massively overvalued." The Swiss National Bank cut target interest rates to "as close to zero as possible" and said it would inject $65 billion into the Swiss money supply in an attempt to halt the franc's relentless appreciation against both the U.S. dollar and euro. Switzerland is not a member of the European Union.

Gold hit another record high of $1,663.40 a troy ounce. A full-blown Italian and Spanish debt crisis would hit large European banks hardest, the Post said, but could also dry up interbank lending worldwide. U.S. banks and investment funds are also more exposed to Italy and Spain than they are to Greece. Direct and indirect U.S. holdings in Italian and Spanish debt amounts to about $450 billion, the Post said.

The European Central Bank has abandoned Italy and Spain to their tortured fate.

Its refusal to act in the face of an existential threat to monetary union has set off violent tremors across the global financial system, raising the risk that the crisis will spiral out of control. Bank shares crashed in Madrid and Milan, with Intesa Sanpaolo down 10pc and Italy's MIB index reduced to its knees with a one-day fall of 5.2pc. Share trading was suspended at a string of bourses across Europe. Yields on 10-day US debt fell to zero in a replay of panic flight to safety seen during the onset of the Lehman-AIG crisis three years ago.

Jean-Claude Trichet, the ECB's president, said the bank had purchased eurozone bonds for the first time since March but this token gesture was confined to Ireland and Portugal, countries that have already been rescued. Professor Willem Buiter, Citigroup's chief economist, said the apparent ECB action was pointless. "The warped logic of intervening in two countries that don't need it is as strange as it gets."

Mr Buiter said Europe risks a disastrous chain of events and the worst financial collapse since the onset of the Great Depression unless Europe's central bank steps in with sufficient muscle to back-stop the system. "The ECB has yet so show it understands that it is the only institution that can save Italy and Spain from fundamentally unwarranted defaults. Everybody is afraid and real money investors are dumping their holdings. The ECB must step in to cap the yields at 6pc or 6.5pc and put a floor under the market," he said.

Italian yields spiked to 6.21pc yesterday after a relief rally wilted. Spanish yields hit 6.3pc. The debt of both countries is hovering near 400 basis points over German Bunds, 50 points shy of the level used by central clearing house LCH.Clearnet to trigger margin calls. This was the point where the debt crises of Greece, Ireland and Portugal crossed the line of no return. Spain has cancelled further debt auctions in August.

"As long as the ECB stays on the sidelines, a speculative, fear-driven withdrawal of market funding can feed a self-fulfilling insolvency. Any number of banks and insurance companies would take huge hits. The ECB will have to come in, or accept the biggest banking crisis since 1931," Mr Buiter said. He said the "fundamental design flaw" in economic and monetary union is the lack of a lender of last resort.

EU leaders agreed in late July to boost the powers of the eurozone's €440bn (£382bn) European Financial Stability Facility (EFSF) bail-out fund so that it may intervene pre-emptively in countries in trouble, but this has to be ratified by all national legislatures and may take months.

Mr Buiter said the fund needed to be increased five-fold to €2.5 trillion to be credible in the long run. "It is quite irresponsible that the euro member states decided to send their parliaments on holiday this summer before they had enhanced the EFSF to effective scope and size. Crises can happen even during inconvenient periods," he said.

While Spain's leader, Jose Luis Zapatero, has suspended his holiday and Italy's Silvio Berlusconi has pledged fresh crisis measures, German Chancellor Angela Merkel is on holiday in Austria and seemingly in no mood to revisit the summit battles of late July. Jose Manuel Barroso, the European Commission's chief, has called for "a rapid reassessment" of the EFSF in order to deal with contagion and a mounting systemic threat. "It is clear that we are no longer managing a crisis just in the euro-area periphery," he said.

Key eurozone officials met yesterday to discuss raising the fund's firepower to €1 trillion, perhaps using a manoeuvre that skirts legal restrictions, although Germany's finance ministry shot down the proposal as pointless coming so soon after the July summit. Bail-out fatigue is becoming ever clearer in Germany, Holland, and Finland, where tempers are fraying.

Mr Trichet said the ECB's governing council was divided over bond purchases but gave no further details. German sources said Bundesbank chief Jens Weidmann voted against intervention, repeating his well-known view that further "collectivisation of risks" poses a threat to monetary stability. German-led hawks say the ECB lacks treaty authority to keep amassing a portfolio of bonds, is on a slippery slope towards debt monetisation and is being drawn deeper into tasks that belong to fiscal authorities.

ECB officials are aware token purchases of Spanish and Italian bonds would soon be tested by the markets, pulling the bank ever deeper into a monetary swamp. The two countries' tradable public debt is more than €2 trillion. The ECB has purchased almost a fifth of the combined debt of Greece, Ireland, and Portugal yet still failed to stem the crises in these countries. Any intervention in Italy and Spain would have to be on the sort of overwhelming scale undertaken by the US Federal Reserve.

"Italy is the third-biggest bond market in the world: the idea that a bit of ECB buying can make any long-term difference is very misplaced," said Marc Ostwald from Monument Securities. Mr Ostwald said the ECB appeared to have bought some Irish bonds today. "This is their way of giving Ireland a pat on the back for delivering on austerity, to show that Ireland really starts to divorce itself from others in crisis."

The ECB increased liquidity for banks, offering unlimited funds for six months to prevent the money markets freezing up. The bank also left interest rates unchanged at 1.5pc and signalled an end to its rate-rise cycle.

A running tally of planned job cuts by European banks reached around 40,000 Tuesday, little more than halfway though earnings season, as firms that failed to control costs or were over-optimistic about growth make the deepest cuts.

Barclays PLC was the latest to confirm job losses Tuesday, saying it’s already cut 1,400 jobs and indicating the figure could rise to around 3,000 by the end of the year. The announcement came as the bank reported a 38% drop in net profit to 1.5 billion pounds ($2.45 billion), partly due to compensation it’s paying to customers who were sold inappropriate insurance.

The Barclays cuts take the total announced by banks reporting in the last week to 35,000. On top of that, UBS AG also confirmed it would slash jobs, with media reports in Switzerland pegging the number of losses at around 5,000. The total doesn’t include a further 15,000 job cuts announced by Lloyds Banking Group PLC at the end of June.

Strong franc hurting Swiss banksUBS and Credit Suisse, which is cutting around 2,000 jobs, are facing an uphill battle against the soaring Swiss franc because they have such a big cost base in Switzerland, but receive a lot of their revenue in dollars and euros.

On top of that UBS CEO Oswald Gruebel made a significant effort to rebuild the firm’s fixed-income trading business in the wake of the crisis, but is now cutting back in areas where it’s not making money, said Christopher Wheeler, an analyst at Mediobanca. “Ozzie is a trader and he’s taking a trader's view by cutting his positions,” said Wheeler. HSBC Holdings PLC will cut around 30,000 positions by 2013, reflecting the fact that the bank “massively over-expanded in retail banking,” Wheeler added.

Soaring costs at HSBC have been a significant worry for investors for some time, leading the bank to announce in May that it will withdraw from markets where it can’t achieve the right scale. Societe Generale analyst James Invine said in a note to clients that costs are still “a mountain to climb” for HSBC and that much of the growth is due to wage inflation in its faster-growing markets. “That is a cost about which it can do very little, particularly given Asia’s strategic importance for the group,” Invine said.

The Barclays cuts are a mix of trimming a bloated looking corporate banking arm and slimming down European retail banking, as well as trimming its Barclays Capital investment banking arm after some pretty aggressive expansion, said Wheeler. Barclays was the bank that snapped up the U.S. operations of Lehman Brothers Holdings, including around 10,000 staff, after the U.S. firm collapsed in 2008.

“In bull markets, you can hide a lot,” he said. “But when you get into these sort of markets you have to address it, because, it sticks out like a sore thumb.”

Now that the debate over raising the nation's debt ceiling has been temporarily resolved, the White House has pledged, once again, to "pivot" to jobs.

If the promise is giving you a sense of déjà vu, you're not alone.

In his very first address to Congress in February of 2009, President Barack Obama promised an agenda focused on job creation. Following every major subsequent event of his presidency -- be it a concerted campaign like health care reform or, much more frequently, an unwelcome crisis -- he has been forced to reiterate that he will now focus on jobs. Just how many times has he made the jobs promise? Scroll up for a look back.

Just a few months ago, European policymakers were scrambling to erect barricades protecting Spain from the marauding sovereign-debt crisis. But now, suddenly, it is Italy in the crosshairs—deeply transforming Europe's problem and putting policymakers in full retreat.

What was a battle to avoid a costly bailout has now become a push to avoid a doomsday scenario. "The line has shifted from Spain to after Spain," said Carsten Brzeski, senior economist at ING in Brussels.

Analysts say the euro zone's rescue fund, if it is expanded as planned to €440 billion ($622 million), is likely big enough to provide aid to Spain—though not for very long. But Italy, with an economy 50% larger and a debt volume two-and-a-half times as big as Spain's, is far too large for the current fund to save. A frantic summertime scramble is now on. The European Commission's president, José Manuel Barroso, fired off an agitated letter, released on Thursday, to the 17 euro-zone leaders criticizing them for "undisciplined communication" and an overcomplicated and incomplete rescue plan.

In Rome on Thursday, Prime Minister Silvio Berlusconi met with unions and business leaders and said the government would devise a "pact" to revive Italy's stalled economy. In response to rising evidence that the Italian government's access to global financial markets was fading, senior Italian officials said on Thursday the state had more than €60 billion on hand, more than the amount of long-term debt it must redeem for the rest of the year. Italy's debt obligations are also spread far enough into the future that it would take years of high-rate borrowing to nudge up the average interest rate it now pays.

But investors nonetheless continued their relentless pummeling of Italy. Yields on its 10-year government bonds rose above 6.2% Thursday, a half percentage point higher than they were a week ago, and the Milan stock market fell more than 5%. Italy's heavy debt has long been a nagging worry. At 120% of gross domestic product, it is second only to Greece's in the euro zone. But while Italy has shown greater fiscal rectitude than Greece, there are at least three reasons it has drawn such rapid scrutiny.

First, the U.S. debt-ceiling drama refocused investors on the risks of precariously indebted nations. With the debt ceiling lifted, investors have flooded out of risky assets and into typical havens such as U.S. Treasurys and Swiss francs. Mr. Brzeski, of ING, notes that part of the widening of the gap between Italian and German bonds is due to an increase in yields investors are demanding to hold Italian paper. But part also is coming from a stronger German bund. That, he says, implies a "shifting of portfolios"—big investors such as pension funds and insurance companies are pulling out of Italy and going into Germany. With the global outlook uncertain, they are unlikely to quickly return.

Second, recent weak economic data across Europe have exacerbated Italy's own economic woes. Its prospects for growth are already weak; the International Monetary Fund forecasts average real GDP growth of around 1.3% through 2016. Italy has lost ground in exports, said Douglas McWilliams, chief executive of the Center for Economics and Business Research, a London economics consulting firm. He said low growth will make it difficult for the Italian government to amass enough revenue to keep debt under control if it must borrow from the markets at elevated rates for a long period. "With very little growth it is bloody hard to get out of a debt squeeze," said Mr. McWilliams, who predicts better growth for Spain than Italy.

Third, problems in Italy would hand the euro zone a far greater crisis than the one it is facing now. In just this month, Italy must repay €36 billion in government debt. That is roughly what Greece will redeem this entire year. A summit of euro-zone leaders on July 21 set in motion a second bailout for Greece and promised new preemptive powers for the bloc's bailout fund. But those powers haven't yet been put in place, and the changes require approval in national parliaments in a process that is tedious and could run into the fall.

What's more, the summit's leaders didn't add to the €440 billion fund, an amount inadequate to protect Italy. The IMF estimates that Italy's gross financing needs—the amount of money it must borrow to repay maturing debt and cover deficits—will run between €340 billion and €380 billion annually over the next five years.

A chunk of that is short-term debt that Italy would likely still be able to roll over—Greece continues to sell short-term debt despite its bailout—but medium and long-term debt redemptions next year alone are around €200 billion. Italy's budget deficit will be around €50 billion.

The bailout fund has already committed €44 billion to Ireland and Portugal, and it is expected to take over the euro zone's remaining portion of the first Greek bailout—around €33 billion—and provide the lion's share of the €109 billion in public money in the second Greek bailout. That would leave it with not much more than a year's funding for Italy.

However bad the economic crisis in southern Europe may be for investors, it is proving lethal for the area’s political leaders. In March José Sócrates, Portugal’s beleaguered prime minister, resigned. Soon afterwards his Spanish counterpart, José Luis Rodríguez Zapatero, announced his intention to step down. In June George Papandreou, Greece’s prime minister, came close to ejection during a fierce debate over an austerity package.

So as he stood up to make the first of two eagerly awaited speeches to parliament on August 3rd, Italy’s prime minister, Silvio Berlusconi, may have had an uneasy feeling he was one in a line of dominoes. If so, there was nothing in the style or content of his address to suggest it. Nor was there much to indicate that he appreciated the magnitude of the crisis facing the euro or the case for drastic action to tackle it.

Many analysts argue that the euro’s difficulties are beyond resolution by any one member. But Italy is crucial. It is the biggest country on the euro zone’s troubled southern flank, and its €1.8 trillion ($2.6 trillion) borrowings dwarf those of any other country in the single currency.

Mr Berlusconi’s lacklustre, almost blithe speech looked like a missed opportunity to influence the course of events. He was speaking after the Milan bourse had fallen for four straight days and Italy’s borrowing costs had reached euro-era records. Hours before Mr Berlusconi’s address, the yield on Italy’s benchmark ten-year treasury bonds hit 6.25%, before slipping back fractionally. Giulio Tremonti, the finance minister, was summoned to Luxembourg for an emergency meeting with Jean-Claude Juncker, head of the euro group of finance ministers.

Not that Italy was alone. The day before, Spain’s borrowing rates too had hit record highs (see article). Both Italy and Spain face the threat of a self-fulfilling fear in the markets that they are fated to suffer a Greek-style financial emergency.

A special euro-zone summit last month briefly calmed investors’ nerves after Italy had been first contaminated by the spreading crisis. But doubts have persisted as to the effectiveness of a €48 billion package of budget-reduction measures rushed through the Italian parliament in mid-July. A renewed bout of concern over the two biggest southern euro-states began gathering momentum on July 29th, when Moody’s, a ratings agency, warned that it might downgrade Spanish debt. The yield on Spain’s bonds started to climb, tracked closely by the return on Italian debt.

Both countries’ borrowing costs have edged close to the 7% mark that heralded bail-outs for Greece, Ireland and Portugal. But even if Spain could—just—be handled, Italy is almost certainly too big to be rescued, and its presence on the international debt markets is daunting. Even though an unusually high proportion of Italy’s treasury bonds and bills are in the hands of Italians, foreigners still hold around €700 billion-worth of the things.

With alarm rising, José Manuel Barroso, head of the European Commission, issued a statement urging national leaders to get a grip. But Italy’s billionaire prime minister was content to tell his fellow deputies: "You are listening to an entrepreneur who has three companies on the stock exchange and who is therefore on the financial battlefield, aware every day of what happens in the markets." Investors were making a big mistake, he hinted: Italy’s economic fundamentals were healthy; its banks were sound (and their shares undervalued, he added).

Mr Berlusconi neither promised to stiffen the austerity package approved last month, nor to bring forward unpopular measures that will otherwise be left to the next government to apply. His most radical proposal was for an overhaul of labour law (if the unions and employers can be persuaded to agree).

Although investors clearly fear the spreading of market contagion, they also have concerns over political stability. During his address to parliament Mr Berlusconi again vowed to remain in office until 2013. Yet there is ample evidence that he is part of the problem.

The same can now be said of Mr Tremonti, whose emphasis on fiscal rigour was until recently seen by investors as crucial to any solution. The finance minister remains vulnerable to a scandal involving a former adviser accused of influence-trafficking. Marco Milanese, who is also a deputy, made available to his boss a flat in one of the most fashionable parts of central Rome. Mr Tremonti claims to have paid him rent, but in cash—an awkward explanation for the man charged with ensuring that Italians pay their taxes.

More important is Mr Berlusconi’s own vulnerability, which is increasing as supporters begin to fret over his waning popularity. His credibility is shrinking: the July austerity package was long on tax increases he had often promised to eschew. And he seems apathetic: before his appearance in parliament this week he had said next to nothing about Italy’s financial crisis in nearly a month.

Mr Berlusconi’s main ally, Umberto Bossi of the Northern League, whose votes keep the prime minister in power, was noticeably absent from the chamber during his speech. One of Mr Bossi’s most senior lieutenants, Roberto Maroni, the interior minister, was there. But, intriguingly, he chose to sit among his party colleagues, and not with the rest of the cabinet.

Economics isn’t rocket science, but the U.S. economy is a little like a rocket. If it has enough thrust, it can escape the tug of economic gravity. Not enough, and it just might go into a tailspin. Economists at the Federal Reserve and elsewhere are studying whether today’s slow growth is a precursor to an outright recession—and if so, why.

It’s widely accepted that a slowly growing economy is more likely to tip into recession, for the obvious reason that it’s already too close to the line; any shock can knock it into negative territory. And today’s slow growth is at least in part a symptom of underlying problems such as consumer indebtedness, high energy prices, and the jitters induced by debt ceiling brinkmanship.

What’s harder to prove is the hypothesis that slowness is not just a symptom of trouble but a cause of it. In other words, some economists say, if the economy grows too weakly, that slowness itself could create conditions that lead to a recession. Why? Maybe the sluggishness undermines consumer and business confidence. Maybe investors lose faith in the recovery so stock prices, already down 9 percent from their April high, plummet.

Or maybe lenders get nervous about borrowers’ ability to repay loans and start withdrawing credit. Any such reaction could cause the very downturn that’s feared. "When the growth rate gets low enough, certain factors may kick in, nonlinearly," says Menzie Chinn, an economist at the University of Wisconsin at Madison and co-author of a new book, Lost Decades.

The debt deal that President Barack Obama signed on Aug. 2 sets up the economy for what might be called a Christmas crisis: If the congressional super committee that’s supposed to negotiate more cuts doesn’t reach an agreement by Dec. 23, some big spending reductions take effect automatically, sapping demand from an economy that’s already starved for it.

Macroeconomic Advisers, a St. Louis-based forecasting service, said on Aug. 1 that the combination of agreed-upon spending caps and cuts required by the fallback mechanism—if it’s triggered—could sap 0.8 percentage points from economic growth in fiscal 2013, which begins in October 2012.

"This economy is really balanced on the edge," Harvard University economist Martin Feldstein said in a Bloomberg TV interview on Aug. 2. "There’s now a 50 percent chance that we could slide into a new recession." Even Federal Reserve Chairman Ben Bernanke has referred in speeches to the risk of an economic stall—another aerospace metaphor. In a stall, a plane loses lift and starts plunging toward the ground.

Federal Reserve staff economist Jeremy Nalewaik in April published a paper, "Predicting Recessions Using Stall Speeds," that identified 1 percent growth or less in the economy "as a moderately useful warning sign that the economy is in danger of falling into a recession." The economy grew at annual rates of just 0.4 percent in the first quarter and 1.3 percent in the second. Nalewaik hasn’t announced what the indicator is saying now about the likelihood of a recession.

The confidence of consumers and businesses will help determine whether slow growth tips over into no growth, says Chris Varvares, senior managing director of Macroeconomic Advisers. "If businesses think things are good, they’ll continue to hire and invest," he says. "But if they’re very uncertain about the future, the initial slowdown could lead them to put things on hold. If enough firms are doing that, you’ve got a down cycle."

The problem is that confidence is indeed shaky, increasing the risk that any fresh shock to the system could be enough to push the economy into recession. Business optimism is "softish," says Varvares: Capital goods orders, excluding defense and aircraft, are growing at an annual rate of 3.5 percent over the past three months before adjustment for inflation, down from 5.6 percent over the past year as a whole. The Institute for Supply Management’s factory index fell to 50.9 in July, just above the 50 mark that divides expansion from contraction.

A plunge of this magnitude foreshadowed all six recessions in the past five decades, with only one "head fake," in 1984, according to economist David A. Rosenberg of Gluskin Sheff & Associates.

Consumers aren’t responding well, either. Retail sales excluding gasoline, building materials, and vehicles grew just 2 percent per year over the past three months, down from a 6 percent rate in the past half-year, Varvares notes. The Bloomberg Consumer Comfort Index is stuck near the lows of the 2007-09 recession. Consumer spending unexpectedly dropped in June for the first time in almost two years.

Unfortunately, lack of confidence in the economy’s prospects could become a self-fulfilling prophecy. This rocket is carrying a heavy payload.

Japan intervened in the currency markets on Thursday to slow the rapid rise of the yen, in the latest response by policymakers to deal with the worsening outlook for the global economy.

The Bank of Japan also announced an additional Y10,000bn to its Y40,000bn asset-purchase programme, to limit the damage of the country’s rising currency on the export-driven recovery in the wake of the devastating earthquake and nuclear disaster earlier this year.

The intervention by the BoJ, which sent the yen lower sharply against the dollar and the euro on Thursday, came just a day after Switzerland’s national bank intervened to weaken the Swiss franc and said it would increase the supply of the Swiss currency to money markets to stem the rapid rise of the franc.

Both the yen and Swiss franc have risen sharply in recent months as concerns about the future of the euro have weakened the single currency and the protracted debt talks in the US have weighed on the dollar. Japan’s central bank cut short its policy board meeting scheduled to finish on Friday to make its announcement. However, the additional Y10,000bn was in line with market expectations.

"There is a possibility that... developments in overseas economies and the ensuing fluctuations in the foreign exchange and financial markets may have adverse effects on business sentiment, and consequently on economic activity in Japan," the central bank wrote in a statement.

Yoshihiko Noda, Japan’s finance minister, has been increasingly threatening to intervene in the currency market all week but this is the first time since the G7-backed co-ordinated intervention soon after the earthquake that the Ministry of Finance has given the go ahead to the BoJ to sell yen. Mr Noda told reporters on Thursday that the yen’s recent moves had been too one-sided and that he had been in contact with both US and European authorities, pointing to unilateral intervention.

It was not known how much the BoJ spent on Thursday’s unilateral action but market estimates put the figure at around Y1,000bn. As a result the yen sank 3 per cent after the intervention to Y79.44 against the dollar, from Y77.06 overnight in New York. Against the euro the yen was down by the same amount to Y113.62 from Y110.05 on Wednesday.

In the equity market, the Nikkei 225 index reversed early morning declines to close 0.2 per cent higher at 9,659.18. The yield on 10-year Japanese government bonds, which briefly dropped below 1 per cent, was at 1.03 per cent, down from 100.74 on Wednesday. The increase in the asset-purchase programme limit was unanimously approved by the BoJ board, as was maintaining the overnight call rate at 0-0.1 per cent. The central bank will increase purchases of a variety of assets including government bonds and treasury discount bills, corporate bonds and ETFs.

Some analysts are sceptical whether the combination of Tokyo’s yen intervention and additional easing by the BoJ will have the desired effect of holding down the yen. With the outlook for the US economy worsening downward pressure is likely to remain on the dollar. Recent US economic data have showed slowing activity in the world’s largest economy and Japan’s second largest export market.

Employment data due out of the US on Friday is likely to add to fears about the slowdown and increase presure on the Federal Reserve to consider a third round of quantitative easing.

"Considering that Japanese authorities are well aware of this environment, today’s action suggests that the MoF intends to take action repeatedly, reducing the near-term chance of dollar/yen falling below the all-time low of 76.25," wrote Masafumi Yamamoto, a currency strategist at Barclays Capital in Tokyo, in a note to clients.

The maximum potential amount of yen-selling intervention is about Y39,000bn, which is "sufficient for repeated large-sized daily interventions for a month", he said, assuming about Y2,000bn of selling per trading day.

U.S. incomes plummeted again in 2009, with total income down 15.2 percent in real terms since 2007, new tax data showed on Wednesday.

The data showed an alarming drop in the number of taxpayers reporting any earnings from a job -- down by nearly 4.2 million from 2007 -- meaning every 33rd household that had work in 2007 had no work in 2009.

Average income in 2009 fell to $54,283, down $3,516, or 6.1 percent in real terms compared with 2008, the first Internal Revenue Service analysis of 2009 tax returns showed. Compared with 2007, average income was down $8,588 or 13.7 percent.

Average income in 2009 was at its lowest level since 1997 when it was $54,265 in 2009 dollars, just $18 less than in 2009. The data come from annual Statistics of Income tables that were updated Wednesday. The average tax rate was 11.4 percent, up from 10.5 percent in 2007, the Internal Revenue Service data showed.

No income tax was paid by 1,470 of the 235,413 taxpayers earning $1 million or more in 2009, compared with the 959 taxpayers with million-dollar-plus incomes who paid no income taxes in 2007.

Total adjusted gross income reported on tax returns, measured in 2009 dollars, was $7.626 trillion, down from $8.233 trillion in 2008 and $8.989 trillion in 2007. Total adjusted gross income was up only slightly from the $7.475 trillion reported in 2001, when there were 10 million fewer taxpayers. Adjusted gross income is the amount on the last line of the front page of a Form 1040 tax return.

The data from tax returns showed a startling drop in the total number of taxpayers reporting any wages. A taxpayer, as defined by the IRS, can be an individual or a married couple. The data showed almost 4.2 million fewer taxpayers reported wages in 2009 than in 2007, with about 116.7 million taxpayers reporting wages and salaries in 2009 -- down from about 120.8 million in 2007. Average wages fell, too, sliding $1,106 to $48,917 from $50,023 in 2007.

Fewer Tax ReturnsThe number of tax returns filed fell to 140.5 million, down almost 2 million compared with 2007, as millions of Americans went from working to having no earned income or so little that they did not have to file a tax return. The number of Americans reporting incomes of $10 million or more also plunged even more than the steep drop in income for the population as a whole.

Just 8,274 taxpayers reported income of $10 million or more in 2009, down 55 percent from 18,394 in 2007. Compared with 2007, total real income of these top earners in 2009 fell 58.6 percent to $240.1 billion, but average income slipped just 8.1 percent to $29 million. While the number of people who earned enough income to file a tax return fell, the share of those filing who paid no income tax rose to 41.7 percent of tax returns, up from 36.4 percent in 2009. The average income of those filing but paying no tax was $14,483.

The share of households filing a tax return but paying no income tax results from two key factors:

One is the drop in incomes because a married couple does not pay income tax until they make at least $18,300, and families with two children pay no income tax until they make more than $40,000 under policies started in 1997 and since expanded at the behest of Congressional Republicans, many of whom complain that too many households do not pay income taxes.

The second reason was that in 2009, nearly all working taxpayers received the temporary Making Work Pay Tax Credit sponsored by President Obama, which saved as much as $400 ($800 for married couples) in federal income taxes in 2009. The credit continued in 2010, but then ended.

This is the stuff of financial nightmares: debt levels still far too high, growth stalled and fiscal policy now in retreat in many Western economies. All eyes are now on the one group of policy makers still able to act to prevent a disastrous drop in demand and slide into deflation. But what is a central banker to do to dispel the demons?

The challenge is to sustain nominal growth at levels that allow for orderly debt reduction. That means higher inflation, given that potential real GDP growth is likely lower than precrisis levels. But with interest rates close to zero in most developed countries, central banks will have to dig deep into their bag of unconventional policy tricks.

The Swiss National Bank is already grappling with the problem. Confronted with a surging Swiss franc that is hurting the economy and increasing the risk of deflation, the SNB on Wednesday slashed interest rates effectively to zero, cutting the target range for three-month Libor to 0%-0.25% from 0%-0.75%, and flooded the money market with cash. That bought only small respite for the franc.

The Federal Reserve and the Bank of England have already tried large-scale purchases of government bonds. It isn't clear that further purchases of Treasurys or gilts will prove sufficient, particularly given that yields are already extremely low and can hardly be driven much lower. A survey of attendees at Fathom Consulting's Monetary Policy Forum this week showed that half think the Bank of England should buy something other than gilts if it undertakes more quantitative easing. Some suggest central banks could buy bank capital securities, mortgages or equities.

Meanwhile, Fed Chairman Ben Bernanke has already run through many of the options outlined in his 2002 speech on preventing deflation; among the remaining tools are direct loans to banks, caps on long-term bond yields or even purchases of foreign assets.

For the European Central Bank, the task is harder, given its pure inflation-busting mandate. True, it has room to cut rates, currently at 1.5%. It could also reintroduce six- or 12-month liquidity facilities for banks facing funding difficulties.

There has also been speculation that the ECB might dust off its bond-purchase program. But the bar for this is set high; the ECB is angry that euro-zone governments imposed losses on Greek bondholders, introducing explicit credit risk to sovereign debt. The ECB might balk at the scale of purchases required to shift Italian and Spanish yields. But it will be months before the beefed-up European Financial Stability Facility can buy bonds.

Of course, such policies alone won't ignite higher growth. And they risk triggering another bout of commodity inflation that squeezes consumers. But they are one way of trying to shore up confidence while debt is paid down. If the economy continues to slow, central banks are unlikely simply to stand by and watch.

The European sovereign-debt crisis placed new strains on the Continent's banks on Wednesday amid signs that some lenders are finding it harder and more expensive to fund themselves. The cash crunch for some European Union banks underscores the challenges that central bankers and regulators face in preventing the bloc's economic and debt problems from seeping into the bank-funding markets.

The barometers that central banks and analysts use to monitor stress aren't showing extremely heightened levels. But certain gauges are flashing warning signals: Bank funding from the European Central Bank increased and European banks and corporations have had to turn to the currency markets for dollar funding, instead of borrowing from one another or selling debt. In countries like Spain and Italy, banks face the added difficulty of having to deal with a recent sharp drop in the values of government bonds that form the mainstays of their balance sheets.

In a report last month, the Committee on the Global Financial System, a central-bank oversight panel, said that an increase in "sovereign risk adversely affects banks' funding costs through several channels, due to the pervasive role of government debt in the financial system." A drop in the value of government debt, the panel said, could weaken bank balance sheets and make it more difficult to obtain funding or use the debt as collateral.

Many European banks have responded to the latest difficulties by hoarding cash. In one proxy of bank anxiety, banks are stashing money at the European Central Bank's ultrasafe but low-interest-rate overnight deposit facility, effectively taking funds out of the banking system. Nearly €105 billion ($149 billion) was parked at the facility on Tuesday, the highest level since February, compared with €86.6 billion a day earlier.

At the same time, banks appear to rely more and more on the ECB for short-term funds, another signs of stress. The ECB's one-week refinancing facility saw borrowings rise to €172 billion from €164 billion. While the increase might seem small, it is significant because at this time of the month demand for borrowings generally would decline, said Irena Sekulska, a fixed-income strategist at Nomura International PLC.

"This takeup was really surprising," she said, calling it a worrisome development. "It could reflect that some euro-zone banks can't fund in dollars." Other analysts pointed to the increase in ECB borrowings as a factor rattling investors on Wednesday.

To further complicate matters, many banks are reporting earnings this week, and investors don't like what they are seeing. In Italy, one of the country's biggest banks, UniCredit SpA, faced numerous questions from analysts about the bank's short-term loans and whether disruptions in the funding market pose a threat. Executives acknowledged the market turmoil was having an impact, but downplayed its severity. "Liquidity…is available in the market. It's very, very short [term], but available," one senior executive said.

Short-term funds typically are less stable and more expensive than longer-term commitments, one of the reasons why banks and regulators try to limit their reliance on short-dated funds. In France, Société Générale SA spooked investors Wednesday when it reported lackluster second-quarter results, with profits down 31%, and backed away from its previous profit targets. The bank cited the turmoil caused by the financial crisis in Greece, where it owns a local bank. Société Générale's shares plunged 9%.

While European financial institutions have continued to borrow using repurchase agreements, or repos, it has become difficult for them to borrow by issuing bonds. "We have seen very little issuance for two months now even from the biggest Spanish banks and Italian banks," said Nikolaos Panigirtzoglou, J.P. Morgan Chase & Co.'s European head of global asset allocation and alternative investments. "In a way, that's a concerning sign."

In the currency markets, the cost for European banks and corporations to obtain dollars in return for euros has increased in recent days, though it remains far below the crisis level seen in 2008. The cost is underpinned by a global bank-borrowing gauge called the London interbank offered rate, or Libor.

The cost to exchange euros for dollars, and then unwind that trade in three months through a derivatives transaction, hit 0.63 percentage point above three-month dollar Libor this week and fell slightly to 0.56 percentage point above Libor on Wednesday. That is an increase from the beginning of the year when the cost calculation was about 0.10 to 0.15 percentage point. The cost in 2008 hit a two-percentage-point level.

The cost effectively measures foreign demand for dollars. Jim Caron, global head of interest-rate strategy at Morgan Stanley, said the increase is a sign that European banks and companies are having to find new avenues for dollars given that U.S. money-market funds are less willing to fund them through the market for short-term loans known as commercial paper. "Banks have many avenues through which to obtain short-term funds, and when one or more of these sources begins to run dry, the others become squeezed further," Mr. Caron said in a report this week.

The funding pressures come amid a large stockpiling of dollar reserves at foreign banks in what had been viewed as an accumulation of liquidity. The U.S. branches of foreign banks have nearly tripled their dollar holdings, from $374 billion at the beginning of the year to more than $1 trillion in late July.

The stockpiling of cash could be a sign of worry among European banks of troubles they fear could come. U.S. regulators are watching the European situation, especially because of the exposure of U.S. money-market funds to European banks.

If U.S. dollar funds become scarce for foreign banks, they potentially could use a swaps program between the Federal Reserve and the ECB as a source of funding. Under this program, the Fed makes U.S. dollar loans to the ECB, which can in turn lend dollars to European banks that need dollars. The program was used heavily during the financial crisis, but as of July 27 it had been untapped.

The almighty dollar used to be the world’s safest refuge in times of trouble. But what do you do when you are worried about the dollar, as many people are now?

Come to Switzerland. An avalanche of dollars and euros has been tumbling into this Alpine outpost at record rates, as investors see the franc as a haven from the twin debt crises in the United States and Europe. And the Swiss are not happy about it.

On Wednesday, the typically silent Swiss central bank declared the currency "massively overvalued" against the dollar and euro, and unexpectedly cut interest rates in an attempt to weaken the franc. The franc retreated slightly but is still too strong, as far as the Swiss are concerned. "The franc is like the new gold," said a Geneva banker who would give only his first name, Dmitri, insisting on the discretion that is the hallmark of this reserved nation. "It’s crazy and it’s all anyone is talking about, in the morning, at lunch, at dinner parties."

It was certainly Topic A at the noon lunch hour recently in Geneva, where Dmitri and other dark-suited bankers had emerged from the doors of Credit Suisse, UBS, Goldman Sachs and many other wealthy banks to perch near the broad expanse of Lake Geneva to chew on grilled fish and the issues of the day.

Switzerland is vaunted as a country that attracts money for its secretive bank accounts and the less savory business of tax evasion. But it is also the home of "le franc fort," a muscular currency long seen as second perhaps only to the dollar because this nation — unlike some others — tends to have its finances in order. Now the Swiss franc is second no more.

Despite the passage at long last of a Washington deal to lift America’s debt ceiling, the dollar recently plunged to record lows against the Swiss franc on fears the American economy will slow further. Even after the Swiss central bank’s announcement, the dollar was trading at 77 Swiss centimes, down about a third from the level of a year ago.

The euro has fared little better. As Europe succumbed to its own debt troubles last year, the franc took off against the euro. Now, as the latest European bailout for Greece fails to shield big countries like Italy and Spain from the credit contagion, the franc remains strong against the euro. Despite the Swiss central bank’s Wednesday move, a euro will buy 1.10 Swiss francs — far less than the 1.38 francs that a euro was worth a year ago.

With the rest of the world so untidy, Switzerland looks pristine. Despite a generous safety net, this tiny nation does not have other onerous expenses, like a big military. Its current account surplus is an enviable 15 percent of gross domestic product, and it has low debt. The economy grew 2.6 percent last year; unemployment is around 3 percent. Still, while it is easy for Switzerland to lure other people’s money, there may be such a thing as too much of it. Even for the Swiss.

The Swiss central bank sought to tamp down demand on Wednesday by narrowing its target band for a key rate, the 3-month Libor, to 0.00-0.25 percent from 0.00-0.75 percent to fight the franc’s appreciation. Authorities declared they "won’t tolerate" a "tightening of monetary conditions," and would take further steps as necessary to curb the franc’s rise. The cost of fine Swiss-made goods, from watches to precision machinery, has gone from eye-popping to eye-watering, and Swiss companies are warning of peril.

"This is bad for the Swiss economy," said Thomas Christen, the chief executive of Lucerne-based Reed Electronics, who has started buying cheaper materials to offset his costs. Everything from a cup of coffee to a Swiss Alpine ski vacation has been priced to the stretching point or beyond reach for many tourists. Mark Tompkins and Serena Koenig of Boston were stunned during a recent visit. "A mixed drink at an average bar," Mr. Tompkins said, "was 18 to 20 Swiss francs" — $23 to $25 — "so two rounds of drinks for four people was crazy expensive."

In downtown Geneva, where a phalanx of regal storefronts glitter with diamonds and gold, Jean Loichot said his business from Americans and Europeans had slowed to a trickle. "In 32 years, I never saw it like this," said Mr. Loichot, whose boutique, Jean Loichot & Cie, specializes in TAG Heuer watches. "And in a few months, it’s going to be worse."

Even one of his longtime European clients, a millionaire with a private jet, recently said he would hold off buying a costly watch until the franc’s value becomes more reasonable. "People have money," Mr. Loichot said as a metallic silver Ferrari and a black Bentley purred past. "They’re just not buying."

Swiss people, on the other hand, are snapping up lots of things — though not necessarily to the benefit of their nation’s economy. On the weekends, Swiss families drive into France to load up on wine, food and other goods at hypermarkets where they can buy with the strong franc. "The parking lots are filled with Swiss license plates," said Keith Rockwell, a spokesman for the World Trade Organization who has witnessed Switzerland’s ebbs and flows for more than a decade.

Meanwhile local supermarkets like Coop, whose shelves are stuffed with products made outside Switzerland, are practically empty because shopping is cheaper elsewhere. Worried, the store recently asked the government to investigate why importers were not passing on the savings they were making from buying euro-priced goods. Newspapers regularly lament "le franc fort," and warn that worse is on the way. Last month, when the Tribune de Genève asked readers in an online poll whether the situation had become "alarming," a majority clicked yes.

"We are in the stratosphere at this point," Yves Bonzon, the chief investment officer of Pictet & Cie, a private Geneva-based wealth management bank, said of the currency. He estimates the hit to the economy is the same as if the Swiss central bank had jacked up interest rates to 7 percent from 1 percent.

When the franc first started to surge during the global financial crisis, the Swiss central bank, which manages the currency, fell into a mild panic. It blew 19 billion francs between 2009 and last year in a failed strategy to keep the currency in line. (The bank lost an additional 10.8 billion francs on foreign exchange holdings in the first six months of this year.)

On Wednesday, the bank steered clear of intervention but indicated it was ready to do more. "There seems to be a consensus that probably the Swiss franc should be more like 1.30 or 1.40 toward the euro," rather than near parity, Walter Meier, the spokesman for the central bank said last week. "But history has shown that these periods of valuation can remain for quite a long time."

While there has always been a silent Swiss schadenfreude about not joining the European Union, some politicians here have even called lately for pegging the franc to the euro. Still, no one really seems to have ideas for action, aside from hoping that Europe and the United States get their houses in order. "That would be the most desirable scenario, but we don’t build hope on that," Mr. Meier said. "You just have to be prepared for the worst, and if it gets better, you’ll take it."

Ever since the European debt crisis began, the risk of contagion — of problems spreading from smaller countries to bigger ones, like Italy and Spain — has worried government officials and investors.

Now, another type of contagion is causing concern: the risk of problems spreading to big banks, especially in Italy and Spain. The growing vulnerability of the giant banks in these two countries is spurring investor fears that Europe’s latest bid to get a handle on its festering debt crisis, adopted just a few weeks ago, has come up short.

The banks own so many bonds issued by their home countries that they are being weakened as the value of those bonds falls, amid concerns that the cost of government borrowing could become too expensive for Italy and Spain to bear. Now there are signs that these concerns are, in turn, starting to making it harder and costlier for the banks to borrow money to finance their day-to-day operations, a troubling trend that, at the worst, could lead to liquidity problems.

Since Europe’s second major rescue package was announced last month — aimed as much at calming fears over Spain and Italy as providing funds to Greece — the yields on Spanish and Italian bonds have hit more than 6 percent, sharply higher than they were paying on new borrowings just a couple of months ago. In doing so they have entered what analysts refer to as the "danger zone" for 10-year bond yields, with the cost of government borrowing so high that investors become unnerved, as was the case with bailed-out Greece, Portugal and Ireland.

Bearing the immediate brunt of this development are regional banking heavyweights such as UniCredit in Italy and Santander and BBVA in Spain, which traditionally have been reliable financing machines to their home governments and as a result are now saddled with large bond holdings that are losing value by the day. Many of these banks hold domestic bond portfolios that exceed their capital levels.

According to a report issued on Wednesday by Sanford Bernstein, a research firm, UniCredit’s exposure to mostly Italian bonds is 121 percent of its core capital ratio. For Intesa, a less-diversified competitor, that figure rises to 175 percent. For Spain, the ratios are no less daunting: a startling 193 percent for BBVA, Spain’s second-largest bank, and a less alarming 76 percent for the global banking giant Santander.

As a result, the markets have begun to focus on a number of warning signs that some European banks are finding it harder to meet their funding needs, especially in dollars. They are borrowing larger amounts directly from the European Central Bank in its weekly lending operations, suggesting they can’t find all the money they need from the private sector to keep themselves going.

Some analysts said perhaps most worrying was that the rate it costs European banks to borrow dollars in the open foreign exchange market, by swapping their holdings of euros, has shot up twofold in the past few days — still far below the levels seen in 2008 when the market virtually froze but the highest since May 2010 when the European debt crisis first started to intensify.

Recent write-offs by French banks over their own Greek bond holdings have compounded fears over the health of Europe’s banks. "I don’t think anyone wants to be long European banks right now," said Simon White, an analyst and partner at Variant Perception, a London-based research firm.

UniCredit, Italy’s largest lender, reported better-than-expected second-quarter earnings on Wednesday and in a conference call, the bank’s chief executive said it had completed 83 percent of its borrowing needs for the year. Nevertheless, that profit snapshot does not fully take into account the steep rise in Italian government bonds, from about 4.6 percent in early June to just over 6 percent now, which means that the value of those bonds has fallen.

Even more worrying is the fact that the European Financial Stability Facility, Europe’s so-called bazooka rescue fund that it endowed last month with the powers to recapitalize weak banks, will not be able to offer any such aid for at least two months. According to a stability fund official, staff members there are working night and day to recast the entity, but do not expect to be finished until the end of August. At that point, it must be approved by the parliaments of the 17 countries that use the euro currency. Only then could it go to the market and raise funds to help a bank in need. That may well be too late.

As investors flee Spanish and Italian government bonds, these huge bond holdings have become a significant millstone on their countries’ banks — curbing their ability to lend and, consequently, heightening the prospect of a double-dip recession in Italy and Spain, two of the euro zone’s slowest-growing economies.

Despite their best efforts to deleverage, all these banks have loans that significantly exceed their deposits. That makes them dependent on the good lending graces of their banking peers in Europe and the United States. This is one of the reasons American money market funds had more that 40 percent of their assets invested in European banks.

Standard banking practice has been for these banks to put up as collateral their home market government bonds, which in the past were seen as liquid, risk-free investments — much like United States Treasuries.

If, as was the case with Ireland and Greece, lenders stop accepting these bonds or start demanding more of the bonds to reflect their lower value, these banks may no longer be able to access the day-to-day financing that is their life blood. This is what happened during the crisis in the fall of 2008, when banks stopped lending to one another, causing markets to seize up — and leading the government to bail them out or risk the weakest banks failing.

"You could have a C.F.O. of a lending bank say, ‘Look, I just do not want to take this credit risk,’ " said Marcello Zanardo, a European Bank analyst at Sanford Bernstein. "We are not there yet — but it is not impossible to get there."

What is worrying many bank analysts — and surely the banks themselves — is that, in an investor panic, one might get there sooner rather than later. One possibility is that LCH.Clearnet, the London clearing entity that in a transaction between two banks or other counterparties assumes the risk if the trade fails, may begin to demand more collateral if these securities continue to lose value.

That would mean that an Italian or Spanish bank putting up a government bond to back a short-term loan or repurchase agreement would see that bond marked down by its clearer, forcing it to put up more bonds — or accept less cash to fund its operations. According to LCH, once the spread between, say, a Spanish or Italian government bond and a benchmark AAA bond index surpasses 4.5 percent, the issuer is liable for a trimming. At that point, the borrower is forced to put up more government bonds as security, and if the spread continues to widen is ultimately forced out of the market.

But in some cases, demands for more collateral are already being imposed. According to one London-based banker, who declined to be identified, LCH has already begun to require large Spanish banks to put up more bonds to cover transactions.

Such was the case earlier with Greek, Irish and Portuguese banks. Exiled from the interbank market — in which banks lend to each other — they were forced to turn to the European Central Bank to satisfy their pressing requirements. So far, Italian and Spanish banks have made minimal use of the central bank’s emergency financing facility. If this trend continues, Merrill Lynch wrote in a report on Wednesday, it "would have a very significant impact not only on Spanish spreads but also on the level of interbank stress. Resulting in full contagion within the euro zone."

The global crises of financial and housing markets are now being superseded by new crises of governments. The fiscal challenges for the weaker members of the eurozone are early warnings, as are analogous problems in American state governments weighed down by unfunded pension and healthcare liabilities. Without action, this new crisis of state competence could soon become just as damaging as its recent financial predecessor.

This week’s US debt deal, along with the prospect of debate on fiscal solutions in the run-up to the 2012 elections, provides some room for optimism. But America’s fiscal problems have deep roots. The recession of 2007-09 stemmed from the unprecedented bust in the housing market, driven by reduced lending standards and propelled by congressional pressures on private lenders and the reckless expansions of Fannie Mae and Freddie Mac. It is, however, important to recognise that this mistake is now understood and will not be repeated.

In the aftermath of the debt ceiling agreement there will be calls for further stimulus for America’s economy. This would be a grave mistake. In the financial turmoil of 2008, bail-outs by the US and other governments were unfortunate, but necessary. However, the subsequent $800bn American stimulus package was largely a waste of money that sharply enlarged the fiscal hole now facing our economy.

President Barack Obama’s administration has consistently overestimated the benefits of stimulus, by using an unrealistically high spending multiplier. According to this Keynesian logic, government expenditure is more than a free lunch. This idea, if correct, would be more brilliant than the creation of triple A paper out of garbage. In any event, the elimination of the temporary spending is now contractionary and, more importantly, the resulting expansion of public debt eventually requires higher taxes, retarding growth.

I agree that budget deficits were appropriate during the great recession and, for that reason, the kind of balanced-budget rule currently proposed by some Republicans should be avoided. However, since government spending is warranted only if it passes the usual hurdles of social rates of return, the fiscal deficit should have concentrated on tax reductions, especially those that emphasised falls in marginal tax rates, which encourage investment and growth.

Despite relief at the debt-ceiling agreement, America’s fiscal situation remains deeply problematic. Any attempt to head off a crisis of government competence must begin with serious long-term reform. Reductions in the long-term path of entitlement outlays have to be put on the table, with increases in ages of eligibility a part of any solution.

We also need sharp reductions in spending programmes initiated or expanded by Mr Obama and his extravagant predecessor, George W. Bush. Given the inevitable growth of the main entitlement programmes, especially healthcare, increases in long-term federal revenue must be part of an overall reform.

So what, specifically, can be done? An effective future tax package would begin by setting US corporate and estate tax rates permanently to zero, given these taxes are inefficient and generate little revenue. Next, it would gradually phase out major "tax-expenditure" items, such as tax preferences for home-mortgage interest, state and local income taxes, and employee fringe benefits.

The structure of marginal income-tax rates should then be lowered. Marginal rates should particularly not increase where they are already high, such as at upper incomes. The bulk of any extra revenue needed to make up the difference should then be raised via a broad-based, flat-rate expenditure tax, such as a value added tax. A rate of 10 per cent, with few exemptions, would raise about 5 per cent of gross domestic product.

Of course, such a new tax would be a two-edged sword: a highly efficient tax, but politically dangerous. To paraphrase Larry Summers from long ago, we don’t have VAT in the US because Democrats think it is regressive, and Republicans think it is a money machine. We will get VAT when Democrats realise it is a money machine, and Republicans realise it is regressive. Obviously, I worry about the money machine property, but I see no serious alternative for raising the revenue needed for an overall next-stage reform package.

The raucous debt-ceiling debate represents a good start in forging a serious long-term fiscal plan. Substantial additional progress will be needed, sadly much of which will probably have to await the outcome of the next US election. Yet progress must be made – or the impending crises of governments, signalled by possible downgrades of US debt, will make the 2008-09 recession look mild.

Spain sold 3.31 billion euros ($4.7 billion) of bonds at higher interest rates after the yield on the country’s 10-year bond approached the 7 percent mark that heralded the bailouts of Greece, Portugal and Ireland.

The Treasury sold 2.2 billion euros of April 2014 bonds at an average yield of 4.813 percent, compared with 4.291 percent when it sold similar debt on July 7, the Bank of Spain said. It also auctioned 1.1 billion euros of January 2015 bonds to yield 4.984 percent. The Madrid-based Treasury sold about 95 percent of the maximum 3.5 billion euros targeted in the debt offer.

The yield on Spain’s benchmark 10-year bond, which hit an intraday euro-era record high of 6.46 percent on Aug. 2, fell today before the sale and stayed lower afterward. "The auction went better than expected," said Cagdas Aksu, a fixed-income analyst at Barclays Capital in London. "The volumes sold are very reasonable." Demand for the three-year bonds was 2.14 times the amount sold, compared with 2.29 times in July.

The Spanish benchmark bond’s yield has jumped as much as about 70 basis points since a euro-region leaders’ summit on July 21 failed to convince investors the spreading European debt crisis can be halted by a so-called selective default for Greece.

Market ReactionToday the bond opened at 6.265 percent, falling to 6.11 percent before the auction and trading unchanged afterward as of noon local time. Analysts said the Spanish sale was reflecting a jittery European market. "The yields are higher but that has to do with what’s going on in Europe in general," Aksu said. "Markets are on the cautious side and it’s not specific to just Spain."

Today’s sale will likely be Spain’s only bond auction this month. The country still needs to sell about 38 billion euros in debt by the end of the year and has completed 60 percent of its 2011 financing, less than the euro-area average of 67 percent, according to a report by UniCredit SpA. "It is positive to show Spain’s capacity to raise funding," Finance Minister Elena Salgado told reporters in Madrid late yesterday, after an emergency meeting with Prime Minister Jose Luis Rodriguez Zapatero to discuss the worsening fiscal crisis.

Salgado said she doesn’t expect borrowing costs to remain so high during the whole month and attributed the current turmoil to thin volume because of the vacation season, the U.S. standoff on the government’s borrowing limit and unresolved concerns after the European summit on Greece.

‘Danger Zone’The International Monetary Fund said on July 29 that Spain remained in the "danger zone," on the same day that Zapatero announced plans to hold early elections in November, bringing forward the date of the vote from March as Europe’s debt crisis drove the country’s borrowing costs higher. Zapatero announced his decision after Moody’s Investors Service put Spain’s Aa2 rating on review for a possible cut on July 29, citing "funding pressures."

Moody’s said the precedent established by the Greek bailout signaled a "clear shift" in risks for bondholders, and that one of the main drivers of its decision is the "increased vulnerability of the Spanish government’s finances to market stress."

City officials said a pension deal approved Tuesday by a union representing police officers, taken together with a arbitrator's ruling in the spring, would save about $100 million in the next five years. Detroit's drive to reduce its pension obligations had been closely watched as cities and states across the U.S. wrestle with the idea of cutting benefits for current public employees.

The agreement approved Tuesday calls for freezing the wages of rank-and-file police officers. It largely mirrors an arbitrator's ruling in April under which 1,500 higher ranking police and firefighters would no longer get a cost-of-living adjustment to their benefits and would see a cut in the rate at which they earn benefits. The arbitrator's ruling set a precedent and pushed the city and the union for the rank-and-file police officers into collective bargaining for an agreement ratified by the Detroit Police Officers Union on Tuesday. A lawyer for the union didn't release the vote tally.

The agreement didn't significantly increase their members' health-care costs or cut benefits, said the union's attorney Donato Iorio. Detroit spent about 25% of its $1.2 billion general fund this year on pensions for union and nonunion employees.

With two retirees for every employee, the city paid $200 million this year toward pensions for its 22,000 retirees and 11,000 current workers. Mayor Dave Bing argued Detroit could no longer afford its pension system as it was structured. In the last four years, as the work force was reduced by more than 10%, pension and health-care costs grew by 40%.

The mayor called for a new system of defined contributions similar to a 401(k) for new employees, while seeking pension concessions from current employees and the funds that manage the benefits. Benefits for those who already retired aren't affected. The officers affected by the agreement approved Tuesday have been without a contract since June 2009 and the newly ratified contract expires in June 2012.

"It shows that we are executing our plan to return the city to fiscal stability by reducing pension costs and doing so through hard work and tough negotiations," Mr. Bing said in a statement Tuesday afternoon.

As global investors flee the dollar and euro for refuge in stronger currencies, those havens have started to send out a message: enough.

Demand for currencies like the Japanese yen and Swiss franc, seen as relatively safe assets to hold in turbulent times, have surged in recent weeks, driving up their value as investors have dumped dollars and euros as a result of debt worries in the United States and Europe. Declaring the yen’s rise to be a threat to the economy, Japan’s Ministry of Finance moved on Thursday to reverse the trend, a day after the typically sedentary Swiss bank unexpectedly cut interest rates in an effort to weaken the franc.

A strong currency might sound like a validation of investor confidence in the performance of an economy. But for trade-dependent Japan and Switzerland, a sudden jump in the value of their currencies can wreak havoc by making their exports uncompetitive. By intervening, though, Japan and Switzerland risk criticism that they are inciting what some market players call "currency wars," where countries compete to devalue their currencies.

Both countries also devalued their currencies last year. South Korea and Brazil intervened in foreign exchange markets earlier this year. And China has long purchased dollar- and yen-denominated assets in an effort to keep its renminbi weak enough to sustain its export economy.

"In a dream world where the Ministry of Finance and Bank of Japan could dictate exchange rates, they certainly won’t mind to see the yen weaken to 85-90 yen against the dollar," Takuji Okubo, chief economist in Tokyo for Société Générale, wrote in a note to clients. "However, with all the developed economies in the world suffering, trying to grow through a weaker currency is likely to encounter resistance."

But Japan right now sees itself having little choice. "The recent rise in the yen in currency markets has been one-sided and unbalanced," the finance minister, Yoshiko Noda, said on Thursday as he announced the start of the intervention. "If this trend were to continue, it would harm the Japanese economy, even as we do all we can to recover from our natural disasters."

On Thursday, Japanese authorities delivered a one-two punch. First, the Finance Ministry said it had begun selling yen and buying dollars. Then the Bank of Japan announced that it had further expanded its program to buy government and corporate bonds, a form of monetary easing aimed at increasing liquidity and helping to dilute the value of the yen.

The yen weakened steadily throughout the day, from 77.15 yen to the dollar to about 80 yen on Thursday evening in Tokyo. This week, the yen came close to a record high of near 76.25 yen to the dollar. At midday Thursday in New York, the yen was trading at 78.96 to the dollar. "We judged that rises in the yen have economic costs, including the risk of damaging corporate sentiment and encouraging companies to shift production overseas," the governor of the Bank of Japan, Masaaki Shirakawa, said at a news conference.

Japan, which had taken a laissez-faire approach to currency policy from about the middle of the last decade, has over the last year become more willing to intervene. Last Sept. 15, with concerns over the American economy mounting, it spent 2.1 trillion yen in its biggest one-day intervention ever.

On March 18, a week after an earthquake, tsunami and subsequent nuclear crisis, the Group of 7 industrialized economies came to Japan’s aid by staging a joint intervention, coordinating efforts to sell the Japanese yen on global currency markets. Traders had attributed the yen’s surge to Japanese companies repatriating funds to finance recovery back home.

But since then, the dollar has again slumped against the yen, falling 5 percent in the last month as investors wary of the debt impasse in the United States fled to other currencies. Even after lawmakers in Washington struck a deal on Tuesday to avert a default or downgrade of United States debt, fresh concerns over the economy again weighed on the dollar.

Japan did not disclose the size of its intervention on Thursday, but traders estimated that the government had spent more than a trillion yen on the maneuver, according to Reuters. Asian central banks, Japanese retail investors and exporters bought into the dollar’s rally, helping to buoy the American currency, Reuters said. The central bank followed with its announcement that it would seek to raise liquidity by increasing its asset purchase program, including Japanese government and corporate bonds, to 15 trillion yen from 10 trillion yen announced previously.

The bank said it would also expand its credit facility — its pool of funds available to buy up assets from banks and other businesses — to 35 trillion yen, from 30 trillion yen. The bank also kept its benchmark interest rate near zero. Still, the effect of moves to influence foreign exchange markets, especially by a single country, has often been short-lived. Japan acted alone in the intervention, though Tokyo was in touch with other countries over the maneuver, Mr. Noda said.

What Japanese policy makers could aim for, Mr. Okubo of Société Générale said, was to hold the yen at the current level in the hope that the American economy showed "some kind of strength soon." Japan has been desperate to shore up its fragile recovery. Even as companies have raced to repair damaged factories and resume production, they have been hit by a surge in the yen that threatens their business overseas.

The March disaster struck an economy that, despite its strong currency, was even more fragile than that of the United States. The Japanese economy has shrunk in two of the last three years, and its debt is twice the size of its economy. Japan’s sovereign debt rating, AA-, is three notches below that of the United States. On the other hand, most of Japan’s debt is held domestically, and the country runs a current account surplus — factors that help to make the yen a haven currency for investors in times of turmoil on global markets.

The recent rise in the yen is, to a large extent, the continuation of a trend that began several years ago with the global economic crisis, which caused investors to flee to the yen. Since the start of the crisis, the yen has strengthened by 30 percent against the dollar.

The muscular yen has been squeezing profits among Japanese exporters, making their cars and electronics more expensive overseas, and eroding the value of overseas earnings when converted into yen. Toyota, Honda and other exporters all recently blamed the strong yen, in part, for their sharply lower earnings in the latest quarter.

And so the nation’s exporters welcomed Thursday’s intervention. "It was a really aggressive appreciation," Kazuo Hirai, executive deputy president at Sony, said of the yen’s recent moves. "The fact that the government decided to intervene was a good thing for Japanese industry as a whole."

When a student asked Sigmund Freud about the meaning of his cigar-smoking habit, the Austrian psychoanalyst is said to have replied: "Sometimes a cigar is just a cigar." By the same token, sometimes a train crash is just a train crash. But the recent high-speed rail accident in China is not one of those.

For many Chinese, the crash and its subsequent mishandling – including what looked to some like an attempt to bury the evidence – have been a revelation. An outpouring of anger has exposed a profound cynicism about how China is governed.

The death of at least 40 people on a high-speed rail line that had become a totem of China’s sleek progress towards wealth, modernity and national prestige is symbolic on many levels. If the trains are not safe, what of the banking system or the management of the economy itself? The tragedy has become a public relations disaster for a Communist party leadership dominated by engineers and technocrats. Just as Mao Zedong sought to create an industrial revolution by force of will in the Great Leap Forward, so China’s present leaders seem to think they can leapfrog technology through modernising zeal alone.

China’s high-speed rail network, built in less than a decade, is the world’s longest. Its trains were supposed to travel at speeds that would put Japanese technology to shame. Instead, the crash has exposed hubris, incompetence and corruption in a single, tragic crunching of metal. Perhaps not since Tiananmen Square more than 20 years ago has the Communist party looked so naked in the face of public contempt.

Certainly, previous scandals have exposed the rotten governance lurking beneath economic success. In the past few years alone, Chinese people have seen their children crushed by poorly constructed schools and poisoned with tainted milk. Both tragedies resulted from corruption and lack of regulatory control that the state subsequently sought to cover up by suppressing press stories and imprisoning the parents of affected children. The train crash is different in at least two respects.

First, high-speed rail was explicitly a national project. The leadership took great pride in China’s ability to "digest" and "improve on" foreign technology. Officials had already laid out ambitious plans to sell the Chinese system to Malaysia, Brazil, the UK and the US.

The national endorsement has made it difficult to pin the problems on local officials. Even before the fatal crash, the government sacked the rail minister on suspicion of corruption. A subsequent decision to lower the maximum speed from 350km per hour to 300km was a tacit admission of dangerous technological over-reach. We don’t yet know the reason for the crash. But pushing the system beyond its technical capacity and cutting corners to free up slush money are plausible factors.

Second, many of the crash victims must have come from China’s new wealthy elites given the, much-criticised, high price of tickets. When school buildings collapsed in Sichuan in the 2008 earthquake, the victims tended to be the children of poorer families. Melamine-tainted baby formula affected a broader cross-section of people. But wealthy urbanites would have had the knowledge and money to buy foreign formula if they chose. That made it slightly easier to quash the story, particularly in an Olympic year when the country was in celebratory mood – or else!

Partly because the victims of this tragedy are members of the new middle class, it has been impossible to keep a lid on the story. Users of Weibo, a Twitter-like microblogging site, have produced an outpouring of contemptuous comment. One posted photos of the rail minister’s fancy watch collection, an indication of his less than modest lifestyle. Weibo alone boasts 140m users, mostly from the urban middle class that the Communist party is supposed to have co-opted into its modernising project.

A middle class revolt is particularly dangerous for the Chinese leadership. It undermines a recent truism of Chinese analysis, sometimes referred to as the Beijing consensus. This contends, among other things, that people don’t worry too much about democracy, freedom of expression and free markets so long as they have a technocratic leadership capable of delivering economic progress.

The cult of GDPism appears no longer to hold. China grew at 10.3 per cent last year, and should clear at least 9 per cent this year. But while taxi drivers riot in Hangzhou over low wages, the revolt over the train crash has been over the more abstract concept of governance. China’s middle class wants a leadership that can contain corruption, ensure safety and not put pride above engineering principles. It wants, in the arresting words of a commentary in the People’s Daily – of all places – economic growth that is not "smeared in blood".

The anger appears to breathe life into an old argument, all but abandoned in the face of China’s relentless economic progress, that a rising middle class will demand more accountability of its leaders. If that turns out to be true, then, alongside the people who tragically lost their lives on the tracks outside Wenzhou, the Beijing consensus itself may also have perished.

Investigators seized documents in offices of both firms, prosecutors said during a televised news conference. The probe began months ago, spurred by contentions from Italian consumer groups that unjustifiably pessimistic rating reports were causing Italian stocks to tank. Three analysts from S&P and one from Moody's are under investigation, Italian news agency ANSA reported.

The ratings agencies "have lost all credibility," Elio Lannutti, head of the Adusbef consumer group told Sky TV. Moody's said in a statement it is cooperating with authorities. "Moody's takes its responsibilities surrounding the dissemination of market sensitive information very seriously," it added.

Standard & Poors said the accusations were unfounded. "S&P considers the allegations being investigated are without any merit. We will vigorously defend our actions, our reputation and that of our analysts," said a statement from the ratings agency. Calls to offices of Trani prosecutors and police went unanswered Thursday evening. The Italian stock market watchdog, Consob, declined to comment on the investigation.

Thursday saw strong turbulence on Italy's main stock exchange in Milan, where the FTSE MIB benchmark index ended down 5.16 percent amid fears that the eurozone's debt crisis might eventually spread to Italy. Trading had begun with a rise, of 1.2 percent, a day after Premier Silvio Berlusconi - in a much awaited speech to lawmakers - proclaimed Italy's economic foundations "solid." He also maintained that the recently approved austerity measures were sufficient to help rein in public debt.

The debt ceiling deal simultaneously slashes programs crucial to our country's functioning and opens the door to more devastating- and mandatory - cuts. The debt ceiling deal hammered out by President Barack Obama and congressional leaders and passed in the House on Monday afternoon makes deep, painful, and lasting cuts throughout the federal government's budget. What's on the chopping block? The numbers tell the tale.

The Obama-GOP plan cuts $917 billion in government spending over the next decade. Nearly $570 billion of that would come from what's called "nondefense discretionary spending." That's budget-speak for the pile of money the government invests in the nation's safety and future—education and job training, air traffic control, health research, border security, physical infrastructure, environmental and consumer protection, child care, nutrition, law enforcement, and more.

The White House's plan would slash this type of spending nearly in half, from about 3.3 percent of America's GDP to as low as 1.7 percent, the lowest in nearly half a century, says Ethan Pollack, a senior policy analyst at the left-leaning Economic Policy Institute. Pollack's calculations suggest the cuts in Obama's plan are almost as deep as those in Rep. Paul Ryan's slash-and-burn budget, which shrunk non-defense discretionary spending down to just 1.5 percent of GDP. The president has claimed that the debt deal will allow America to continue making "job-creating investments in things like education and research." But on crucial public investment, Obama's and Ryan's plans are next-door neighbors. "There's no way to square this plan with the president's 'Winning the Future' agenda,"Pollack says. "That agenda ends."

Environmental protection offers one useful window onto the damage this deal might inflict. The president has boasted that his deal with the GOP will usher in an era featuring "the lowest level of annual domestic spending since Dwight Eisenhower was president." But Melinda Pierce, a lobbyist with the Sierra Club, says the plan could choke off funding needed to enforce the bedrock environmental-protection laws on the books, including as the Clean Water and Clean Air Acts. "Remember, the Eisenhower era was before we passed the Clean Water Act and the Clean Air Act," Pierce says. "There just won't physically be the funds available to protect drinking water and to ensure there's clean air to breathe."

Ben Schreiber, a tax analyst with Friends of the Earth, a national environmental advocacy group, says the Obama-GOP debt ceiling deal could also drive a stake through the heart of investments in wind, solar, and other clean-energy technologies. "The clean-energy revolution becomes a casualty of these cuts," Schreiber says. He adds that the Environmental Protection Agency also sends money to the states for their own environmental protection efforts, which could suffer after such a drastic cutback in domestic spending. At the same time, he says, corporate subsidies for oil and gas companies, worth an estimated $30 billion over ten years, are untouched in the latest debt ceiling proposal. "Polluters are getting off scot-free," he says. "We're basically turning the environment over to the industry."

Jobs programs could also go under the knife. Rick McHugh, a staff attorney at the National Employment Law Project, points to two endangered programs: the Workforce Investment Act, which funds job training programs for young, adult, and dislocated workers, and the Trade Adjustment Assistance program, which provides benefits and training to workers whose jobs were lost due to outsourcing. McHugh says both programs are necessary at a time when 14 million Americans are out of work.

McHugh adds that the bill does not include an extension of federal funding for unemployment benefits, which is set to expire at the end of the year. All told, he fears that already weak job market could be dealt a massive body blow by the Obama-GOP debt deal. "To have this big of an austerity proposal in Washington is disconcerting and misguided," he says.

When it comes to public funding for education, the picture is more mixed. The White House's proposal protects Pell grants for low-income college students, a big victory for education advocates. But protecting Pell funding meant eliminating an interest-rate subsidy for graduate students and a perk that lowered interest rates for graduates who made their loan payments on time. Amy Wilkins, the vice president for government affairs and communications at the Education Trust, says funding for K-12 public schools, Head Start, special education, and more are vulnerable too.

Nor is this the final round of cuts. The Obama-GOP deal also sets up a bipartisan deficit reduction committee that must identify, by the end of 2011, an additional $1.5 trillion in cuts to be spread over 10 years. If the committee fails to reach an agreement or Congress fails to enact its recommendations, across-the-board cuts totaling as much as $1.2 trillion will occur anyway. In the end, nondefense discretionary spending could see billions more in cuts on top of the initial $570 billion. Social Security and Medicaid would be protected from deep cuts, but Medicare could be cut by hundreds of billions of dollars if, for instance, the committee decides to raise the eligibility age for the program.

What's not in the deal could hurt too. In particular, EPI's analysis estimates that not extending federal unemployment benefits and the payroll tax cut, combined with the deal's array of cuts, will result in 1.8 million fewer jobs and a loss of $241 billion in economic output in 2012. "It's going to suck a good deal of demand out of the economy," EPI's Pollack says. "It's going to be devastating."

The management of pension fund assets is big business. Every broker, hedge fund manager, private equity fund manager, and mutual fund manager wants a piece of this mega-trillion dollar action. High priced consultants stand ready to advise pension administrators which fund managers to include and exclude in their portfolios.

Government employees, both active and retired, depend on the ability of pension plans to generate sufficient returns to fund their retirement. With all the resources available to them, you would think this wouldn’t be a problem. You would be wrong.

One study looked at the selection and termination of investment management firms by plan sponsors including public and corporate pension plans, unions, foundations, and endowments. It examined 8,755 hiring decisions by approximately 3,700 plan sponsors over a 10-year period from 1994 to 2003. The managers hired were responsible for an aggregate of $737 billion in assets, while the fired managers handled $117 billion. Clearly, the plan sponsors had their pick of the finest fund managers available.

One of the criteria used to select these managers was their past performance. Three years before hiring they beat their benchmarks by an impressive 2.91 percent per year. For the three years post-hiring, these investment stars underperformed their benchmark by an average of 0.47 percent per year.

The hiring and firing cycle continued. Underperformers were fired. But here’s the twist. After being fired, the excess returns of the fired managers on average were better than their replacements. The lesson is clear: Past performance is not predictive of future performance. Here’s a simpler way to put big bucks in the pockets of pension plan beneficiaries:

Fire all plan consultants who try to pick funds that will beat the markets.

Limit investments to a globally diversified portfolio with an allocation of approximately 60 percent stocks and REITS and 40 percent bonds, using only passively managed funds from firms like Dimensional Fund Advisors and Vanguard.

The Florida Retirement System is an excellent example of the significant impact these changes could make. According to a recent article in the St. Petersburg Times, Florida pays 148 employees who supervise about 190 private fund managers and a bevy of consultants, researchers, auditors, and lawyers. But what would happen if this huge infrastructure was dismantled and the Florida plan switched to a 100 percent index-based portfolio, which, presumably, could be run by a couple of internal staffers?

A study by Index Funds Advisors looked at the decade ending December 31, 2010, during which the Florida Retirement System’s assets had grown to $124.2 billion, with an annualized net return of 4.6 percent. [Full disclosure: I am a senior vice president of Index Funds Advisors]. The analysis compared these returns to simulated and annually rebalanced portfolios of index or passively managed funds from Dimensional Fund Advisors, Vanguard, and a set of industry benchmarks which had approximately the same amount of risk as those in the Florida plan. Index funds are low cost investments that track fixed rules or various benchmarks, regardless of market conditions.

The study assumed a beginning value of $79.2 billion, based on the annualized net returns of the plan assets over the past ten years. The simulated index portfolios had an ending value of about $165 billion using Dimensional’s passively managed funds and about $142 billion using Vanguard’s funds. The net difference to plan participants could have been $40 billion with the Dimensional portfolio and $17.8 billion with the Vanguard portfolio.

When the study compared the returns of the Florida plan to 26 years of simulated index data generated by Index Funds Advisors from January, 1985 to December, 2010, the results were more staggering. Plan beneficiaries could have missed out on as much as $50 billion. You can see the sources of this data and disclaimers here.

The ramifications of this study, which has been expanded to almost all 50 states, are profound. It appears the fees paid to active consultants and active fund managers significantly detracted from returns that might have been achieved with low-cost passive consultants and managers who follow consistent rules, regardless of market conditions.

294 comments:

I'm not so sure about the EU/ECB "throwing in the towel" just yet. Someone in the world needs to be either monetizing and/or shifting around substantial amounts of bad debt. Our leaders are ultimately weak/pathetic people, and I can't see the European variety stiffing major bondholders to listen to their people. If Germany doesn't accept increasing the ESFS capacity, then they have to let the ECB print some money for Italy and Spain. Perhaps a combination of both. The BOJ is practically useless, China and Russia are quite dependent on a healthy Europe and the US/Fed is going to find it difficult and/or unfavorable to implement substantial asset purchase or stimulus programs in the near future. Anything Europe does won't work for long, but it's hard to see them not even trying. I'm interested to hear what other people think about this situation. We are indeed at a very interesting juncture.

The ECB might balk at the scale of purchases required to shift Italian and Spanish yields. But it will be months before the beefed-up European Financial Stability Facility can buy bonds.

The stockpiling of cash could be a sign of worry among European banks of troubles they fear could come. U.S. regulators are watching the European situation, especially because of the exposure of U.S. money-market funds to European banks.

If U.S. dollar funds become scarce for foreign banks, they potentially could use a swaps program between the Federal Reserve and the ECB as a source of funding. Under this program, the Fed makes U.S. dollar loans to the ECB, which can in turn lend dollars to European banks that need dollars. The program was used heavily during the financial crisis, but as of July 27 it had been untapped.

Large international companies are sitting on trillions of excess cash. They are just waiting for the right opportunities to swoop down and gobble their weaker competitors. This dip in the stock market is a buying opportunity for those companies.

They are lobbying the US to allow all of their overseas profits to be repatriated -- tax free -- so that they can feed off the near dead.

CHINA --- a lender of last resort.It must get involved or suffer the consequences of an uncontrolled crash.jal

My response would be to address the recent comments by Nassim and Chas about the future of Parisian properties. It seems increasingly likely that Paris has not suffered its last bombardment by German and possibly other militaries. The people of Europe are, I suspect, soon to be a very unhappy and vengeful lot.

" I can't see the European variety stiffing major bondholders to listen to their people. "

Stacy Herbert over on their site explained this eloquently. She observed that central banks, goverments and bond holders no longer perceive a need for mere people or manufacturing base any longer. All the big bucks are now in financial instruments of various kinds, making people and real goods superfluous.

Of course they're not REALLY as dismissable as TPTB seem to think they are... a fact that will be brought to their attention rather jarringly, I expect.

DBS said..."Of course they're not REALLY as dismissable as TPTB seem to think they are... a fact that will be brought to their attention rather jarringly, I expect."

Yeah, Berlusconi has just decided that he will decimate his country and its people via austerity to stay in the ponzi for just a tad bit longer, as a part of the ECB's Mafioso QE plan. It's looking like the military forces of Western and Central Europe will be employed against their own people before other countries, as the people react violently to brutal austerity and ineffective bailouts.

For those who didn't follow Ash's comment, ZH posted within the last two hours the following:

And from Reuters:

The euro jumped against the dollar on Friday, hitting session highs, after sources said the European Central Bank said it is ready to buy Italian bonds if Italy commits to accelerate economic reforms to bring down the country's debt.

On Thursday, traders were disappointed that the ECB were buying Portuguese and Irish bonds instead of Italian and Spanish debt. Investors are currently focused on Italy and Spain, as they feared these two countries would follow Greece's footsteps in seeking a bailout.

The euro rose as high as $1.42470 and was last at $1.42137, up 0.8 percent.

========However, ZH didn't link it and I couldn't find it with a search of Reuters. It seems to be responsible for the surge in fortunes of the S&P500 in the last two hours which looked like it was headed for a rendezvous with Cerberus. Any bond buying by the ECB will be monetized printing of the Euro as the ECB cannot (legally) commit member countries to debt without ratification. I am sure this will make the German public ecstatic.

Banks in Denmark, home to the European Union’s toughest resolution laws, need to refinance about $35 billion in state- guaranteed debt in the next two years. The government has rejected calls to extend its backing, arguing the industry should instead consolidate. Lenders already face higher funding costs as two regional bank failures since February triggered senior creditor losses. Moody’s Investors Service warned in May borrowing costs for Danish lenders will increase “long-term.”

Bank of New York Mellon Corp. (BK), the world’s largest custody bank, will charge institutional clients a fee for “extraordinarily high” cash deposits to stem a flight of capital into the safety of bank deposits.“I’ve never seen this happen, not in 25 years,” Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, said an interview. Other banks may follow BNY Mellon’s lead, Cassidy said.

.......................

Money market rates, which surged during the debt ceiling debate, dropped below zero percent today as Europe’s sovereign- debt crisis bolstered U.S. government securities’ appeal as the world’s safest assets. With little scope to reinvest deposits in short-term debt at a profit, banks like BNY Mellon are left with the cost of insuring the deposits with the Federal Deposit Insurance Corp.

CHS' new post makes the case for no QE3 next week, as we were discussing yesterday.

http://www.oftwominds.com/blogaug11/dont-bet-on-Fed-8-11.html

The folks running the Fed are not stupid, though they may be profoundly misguided. If they announce a vast QE2-type "easing," they would be taking on a potentially fatal risk, as the entire blame for the coming debacle would fall squarely on the Fed. They know a QE2-type easing will fail, because they have undeniable evidence that QE2 failed.

In other words: since they know QE3 cannot revive the economy or the market, then why on earth would they bet the farm pursuing a policy that's doomed to fail? That would be a form of institutional suicide.

While doing nothing would expose them to political heat from politicos desperate to revive the economy by any means, the Fed is not about to step in front of the train just to satisfy inept congresspeople.

What is the least-risky course of action for the Fed? Announce some wimpy half-measures to dodge the accusation of doing nothing, but also avoid any grand QE3 measures which would shift the blame for the coming meltdown on the Fed.

Second Ash's opinion of today's CHS. Brilliant analysis. He may even be right. Depends on the accuracy of his statement that the Fed may be misguided but it ain't stupid. Ben's helicopter needs a ring and valve job with some down time in the shop.

It became clear very quickly that the issue was non white, non English speaking immigrants.

scandia,

The Norwegians have had expansion for a long while. The UK is somewhat different as they still see these people as a left-over from their empire/commonwealth.

What will happen in places like Norway when they do have serious stress. I guess we may find out sooner than expected.

One things that surprised me is that the city of Paris owns a lot of flats. It seems to me that at some point they may have to sell them to get money, which will drive down prices.

If these are the flats I am thinking of, they are ones for insiders - for the management of la Ville de Paris and their political cronies. The flats are let out at well-below market rates. Chirac, who was mayor or Paris when I lived there, got into trouble over it at one time. His deputy, Juppé, became prime minister and then had to resign when it came out how little rent he was paying for a fantastic flat.

Ash said...It's looking like the military forces of Western and Central Europe will be employed against their own people before other countries, as the people react violently to brutal austerity and ineffective bailouts.

Which differs from the 1920s and 30s exactly how? Of course they will be used against their own people first. But as we saw in Russia and el gallinazo's personal hero Smedley Butler, militaries are rarely very happy attacking their own people. The police are another matter. I think the only instance I can recall of police siding with revolutionaries was in Tunisia.

They are all on average of the warrior class, but a very different mindset. Police know their retirement plans are hostage to the current government. Militaries are confident that their place in society will not be altered much and they tend not to benefit all that much from corruption.

So, my prediction, when they have finished settling their homeland's political affairs, the general's and dictators will turn their attention to their neighbor's affairs.

Personally, I think the two issues with QE3 are whether it will happen very soon, and whether it would be successful in creating an appetite for "risk assets", namely stocks. The so-called "wealth effect" that they talk about, which is, of course, the effect of allowing major players to earn short-term profits and dump their positions to clueless investors at higher values. If it won't do the latter, and it may also bring on significant heat to the Fed when the market still cascades down, then that fact may undermine the likelihood of the former occurring (imminent QE3). There are, after all, other somewhat more stealthy ways of transferring wealth during a deflationary implosion. "Stealthy" to the extent that they are not being bandied about in the MSM, and it takes some effort to figure out what they are. And, of course, the fiscal/legal tools of wealth transfer will still be carried out in the open. No doubt QE3 will occur in the future... it just seems that there are a lot of people are talking about it going down next week.

"" , one can reasonably assume there are way too many people to meet everybody’s self-interest, especially when self-interest is dramatically unfettered, damned to the public interests.""

How does one go from regular old "self-interest" to "dramatically unfettered self-interest? Where is that line? Ya know, I was going to buy a 1500 square ft home, but I decided to unfetter my self-interest and go for a 3500 sq ft.

Of course, we know it's really everybody's "rational self-interest" to replicate American suburban living and consumption habits because americans are so rational and know what is in their self-interest. It's the most free country on the planet, by God! Nobody tells us what's in our self-interest, er, never mind.

Even though, after decades of militant hyper-consumerism and it's attending anxiety and depression makes it apparent that everybody's "self-interest" is to become mentally unhealthy. At least that is what the data shows. Well, it's certainly in big pharma's interest(that uses more resources in their self-interest).

If corporate advertising leads consumers to buy harmful products or over-consume, they must be expressing their "rational self-interest' — because we know by assumption that consumers always do what's in their 'rational self-interest'. How do we know that? Because to do anything else would be irrational. And how do we know that individuals always behave rationally? Because that is the premise from which we begin.

Ergo we must use what we have deemed "rational self-interest" or even unfettered "rational-self" interest and extrapolate that out to determine the future. How do we know that is what is in our self-interest and what we will seak- why, because anything else would be irrational!

Were people in Europe openly revolting against their own governments in the 1930s? I do see international warfare as a likely outcome of our current path, but more as a function of resource scarcity and environmental breakdown than the initial stages of financial collapse. People talk about the rise of another Hitler in response to extreme nationalism, but in many ways we have already been "cursed" with another Hitler... he just operates at a global scale via surpanational financial institutions, industrial corporations, corrupt political structures and extensive military-intelligence networks. In the developed world, we have all been complicit in his rise to power, but we have failed to accurately identify that he even exists. That is changing, though, and most evidently in the ME and Euro-periphery right now, IMO.

you asked, "Have you seen this piece by Uri Avnery yet? "How Godly Are Thy Tents?"

I have now. It was a good read and seems to support my estimation that protestors in Israel are far more politically astute than their counterparts on this side of the pond.

Nonetheless even the sophisticated Mr. Avnery shies away from the real take-away message of these rumblings.

It's that the rumblings are coming from EVERYWHERE.

It's not about high rent in Israel, austerity in Greece, or endemic oppression throughout the Middle East and North Africa.

It's about 6.9 BILLION people just starting to wake up to the reality that they have been marked for mortal sacrifice to the life styles of a tiny handful of oligarch's and sycophants.

It's the Primary Lesson of History playing out once again. Revolution. On an unimaginable scale.

A handful here on TAE ( and a few other sites ) are like the seismologists listening to the earth around Mount St Helens.

We listen. We measure. We estimate and we warn as best we can. A few take heed. Most don't. In any event, the eruption is simply going to happen regardless, so it's a real good idea to keep our eyes peeled and our ears perked up to maximum sensitivity.

As Dimitri Orlov observed, however, prognosticating disaster is a fruitless career move. Beforehand no one listens, and afterward no one cares.

About the only good it does is to save, gratis, a few bright souls who might otherwise have perished.

With regards to the military attacking its own people, it's a thankless mission, and I'm not at all sure that everyone will follow orders. I am confident, though, that the orders will be given, when police forces alone are not seen as adequate.

Ash said...Were people in Europe openly revolting against their own governments in the 1930s?

I guess how many governments were suffering revolts in the 1930s would depend on what one means by revolting. There was certainly the Spanish Civil War. The end of the Wiemar Republic could be considered the result of a revolt led by the Brown Shirts, who Hitler immediately betrayed in order to gain the uneasy allegiance of the Prussian Officer Class.

The late teens and 20s and 30s were a busy time for antigovernment movements, especially in Europe. Wikipedia has lists of some of these events.List of revolutions and rebellions

Some 80 years after George Orwell chronicled the lives of the hard-up and destitute in his book Down and Out in Paris and London, what has changed? Retracing the writer's footsteps, Emma Jane Kirby finds the hallmarks of poverty identified by Orwell - addiction, exhaustion and, often, a quiet dignity - are as apparent now as they were then.

Good observation. Our now lengthy exposure to weapons of mass distraction has done little to alter the contours of the human terrain. Except to deprive the vast majority of the often simple but essential knowledge and skills that were common to most of our ancestors. I think that life after the collapse will be unlike anything that has been seen in a very long time. At least in the formerly well off societies.

Fred on retirement programs. I believe what the estimable wordsmith is tryin' to say here is that we been enjoyin' the benefits of feudalism for some time now. If I interpret correctly, he harbors a warm regard for the likes of Robin of Locksley.

I tell my kids, never get into a retirement program. Save your own money. Steal. Set up a business, found a cult. Learn credit-card fraud. Retirement programs are indentured servitude with a better address, the financial equivalent of a lobster trap: You can get in but you can’t get out. Half the US is running at $6500 on the Visa and counting the last fifteen years until life begins.

Funny me posting something by Nate, possibly one of us is mellowing with age? It is quite an enjoyable interview on Martinson's blog, and thankfully not quite in the typically overly gushy 'meeting of minds' style.

Nate Hagens: No. Just, I think it’s safe to say for a couple of generations, we’ve been observers of history and we’re about to be participants again. And everyone can play a role, or not. And I think things could be probably a lot better than we fear. But just be prepared and start to pay attention.

I think Nate has a point. But, I'm not very sanguine about how well observers will handle the transition to participation. That is a pretty large leap.

i've often wondered if the peak of population loomsand our time is bright but short just like a fleeting flower bloomsand maybe there's no going back the tipping point's been crossed'cause we're all of us the most we'll be - peak people

The S&P downgrade is a bit of a shocker. I was fully expecting them to cave after this week market's action. Unless it's viewed as a positive for the big boys who can't afford to keep the yield curve completely flat and/or the justification for more serious and immediate austerity plans in the US, a la Italy. Those are still a bit of a stretch, so maybe the rating agency just has a death wish.

I guess the quadrillion dollar question is whether this move will have significant impact in the Treasury market. It can't be good for "risk asset" markets, and the USAA bondage device still looks like a safer bet to me than that of Japan, France or Italy. Perhaps Canada will see some capital flight. Is this another factor in favor of QE3 or against it?? I'm having a hard time even forming an opinion about that one.

The other issue is whether major institutions will need to scramble for more cash when the rating profiles of their portfolios are readjusted to this decision on Monday. Needless to say, that right there would be a category 5 deflationary shit-storm. The administration is of course trying to undermine/mitigate this development in every way possible. And then there's this guy...

"Some market participants were sympathetic. “It’s a headline grabber that may shake Main Street confidence, but I’m confident it won’t result in higher Treasury rates,” said Jack Ablin, chief investment officer at Harris Private Bank. “I believe it will have little market impact near-term. There’s a global glut of savings with few safe havens. The US, Japan and Italy are the three most liquid sovereign bond markets. Which would you want?”

How spectacularly quiet it is out there today, especially in light of the historically momentous downgrade of the US bond rating.

It's as though the world's mid-level players are so totally engrossed with listening for the shoe to drop that they cannot be distracted by something as relatively SMALL as the single resounding PLOP of a shoe landing in the middle of the parlor (right there in the middle, ya know ? Between the the pig and the elephant, next to the gorilla. )

They've never been in the middle of a REAL 'shoe' storm before, and so they don't realize that this IS what it sounds like.

They're waiting for an ear shattering Kuh-Raaash!!!

Of course that big noise IS coming, but by that time no one will be listening because one individual shoe or another will have landed on ( and squashed ) each and every person in the room.Plop! Plop!

You want to fight with Bernanke? Do you really? That boy will tear you up. He'll tear you a new one. He's a black belt ninja assassin. He's lean mean bruiser. He's a little man with a chip on his shoulder. He's full of piss and vinegar. He's got brass knuckles. He's got your number. You mess with that bull and you'll get the horns.

Are we completely certain that Cheryl is... how shall I pose this delicately ? .... chromosomally authentic ?

I ask because "her" strategy is one that only the highest levels of testosterone could long sustain.

Of course, there are quite a few 'steers' now shuffling their way through the stockyard chutes ( on their way to that big white building ) who previously thought that THEY had a pretty impressive "pair" at one time.

Their predecessors thought the same thing and are now being served up at Mc Donald's by former MBAs working for minimum wage.

All the best to ya, Cheryl. I understand that you can just catch a glimpse of that beach house from the back door of the La Jolla Micky D's.

The "debt ceiling crisis" was averted just in the nick of time, to be followed by...

Italian and Spanish bond markets imploding, $4.5 trillion wiped out in equity values over 7 trading days (in comparison, the US politicians "negotiated" $2T in spending cuts over TEN YEARS), investors PAYING the Bank of NY Mellon to LEND it money on deposit, the ECB making desperate moves to calm markets Friday afternoon (when, incidentally, Cheryl was the only person "buying the fucking dip"), only to have the S&P bring in the weekend by downgrading US Treasuries to AA+.

Ben Bernanke is the little man behind the curtain, not the all-poerful wizard. Don't believe the hype.

On the balance of probability, phase 2 of the credit crunch has begun. The larger trend should be down for a very long time. It is likely to be longer and stronger than phase 1. I wouldn't touch equities with a barge pole. T-Bills are much safer.

I'm not worried about the US downgrade or higher interest rates on US government debt. The perception of risk regarding those assets is largely an artifact of the rally. That trend, along with many others, is set to reverse. The US should benefit sufficiently from a flight to safety that it should have little difficulty selling its bonds for the next while. As awful as its finances are, it's the least worst option, at least initially in the deleveraging period.

Cheryl displays an eerie psychotic delusion reminiscent of a character from the movie "The Day After". Which was an 80s TV movie about nuclear war. In which, after acknowledgment that missiles were in the air, with people were scrambling to and fro preparing, the mother of the main character was making beds and setting tables. The father goes to her and says something to the effect of "Come on we need to get into the basement". The mother responds "but, but, the wedding. We need to get ready"

Stoneleigh said, "The perception of risk regarding those assets is largely an artifact of the rally. That trend, along with many others, is set to reverse."

That's interesting. If S&P were to pull this stunt earlier in the year when the system was in "risk on" mode, the implication for US bonds could have been more extreme, at least for awhile until deflationary realities set back in. Right about now, in fact, may be the best possible time for a downgrade to come out, when it will do the least amount of damage to the bond market. The debt ceiling has been raised, European bond markets are fully under the spotlight and risk assets (stocks, commodities, MBS, etc.) are more disgusting than ever.

Side bet for Monday. This could make me look like an idiot, but I think treasury yields fall as the risk-off trade increases. Can this come at a worse time for a nervous market? By the way, maybe you want to go long Kimberly Clark, as they make Depends (the adult diapers here in the US, for my non-US readers), because sales are going to skyrocket all across the financial markets.

Can we say Endgame, gentle reader? Madness. And now on to the regular letter. More to follow Monday.

""So I’m not necessarily calling for a stock-market crash in the next decade, but I am calling for within the decade we probably won’t have a stock market. ""

It's good to see that people are finally getting it. More appropriately, we wont have a stock market if we know what's good for us. The death of the "market system" is going to be a bitter pill to swallow and the lizard brains the rule over us all with whimsy and delight will fight it to the bitter end. But, it's nothing more than the social manifestation of an atavistic endeavor and needs to go if our species decides on continuance.

Well excuse me, I have to go ruthlessly maximize my genetic self-interest.

Well, since you so delicately asked, I would simply reply that there are some here that have had that suspicion since it first appeared in the fall of 2009.

Cheryl opened with a supplication to I&S to reassure her that a banking crisis was imminent to help convince her husband to keep their savings in T-bills. She badgered for about 3 posts and after Stoneleigh revealed that Elliot Wave Analysis played a role in her thinking, Cheryl magically transformed into a rabid equities pumper. Cheryl is a shape shifter. Quite possibly one of the very earliest sock puppets. I suppose it is an honor of some sort.

SecularAnimist said..."... we wont have a stock market, (in 10 years), if we know what's good for us."

Now, that would be a real crash.Time to go back in time to an old system.

grubstake: Supplies or funds advanced to a mining prospector or venture starting a business in return for a promised share of the profits.

If there are no finds/profits then the the investor losses his grubstake and has no claims on the prospector or venture. The investor becomes a partner in the venture and gets a percentage of gains or losses.

There are NO interest payments.

Like the good old days. No middle men. No coin changers in the temple. No Cheryl buying and trading grubstakes.

Nearest I came to that sort of life was when I was commercial fishing herring and salmon. Business agreements were made on a handshake and generally faithfully kept.

One trip stands out in mind where due to losing so much gear in bad weather that our herring venture had come up empty. I was pleasantly surprised to get a small check from the owner of the boat and an accounting of expenses. He could have just pocketed the money and I would have been none the wiser.

Also have since those earlier days experienced F.A.'s and Brokerages that are as disgusting, or more, than any sea cucumber. When the sea cucumber is trapped it will puke out it's guts and leave you holding an empty sac of skin while it goes on it's way to cucumber once again.

Yes, Cheryl has been flaunting her feminine side since she arrived, though many here including myself, have seen her in the meat world as bloated and with a day's beard, downing boilermakers with a drunk Ben Bernanke at the local tavern as reported in a video this week by the "world's finest news source." No Nobel for literature for her - she can't stay in character. Never heard a woman, not to mention a woman who models herself on the Duchess of Windsor, use the expression, "He'll tear you a new one." Indelicate imagery to say the least. And middle-aged low self esteem women don't like yellow Jags. They like pink Cadillacs - just ask Mary Kay :-) Younger, promiscuous ones like red Miatas. As to movies regarding her, my memory was forced back to the "love scene" in "The Crying Game."

If clicking emerald slippers refers to Dorothy of Oz, I must protest. The original slippers were of silver in the book, which had great importance symbolically regarding the great banker induced post war (CW) deflation, as Dorothy tread the Yellow Brick Road with them, while Hollywood, ever oblivious to anything beyond the most superficial, changed them to ruby to enhance the new, thrilling technology of Technicolor.

I am not a huge fan of technical analysis. I think at this point its accuracy comes primarily because all the 'bots are programmed with it, making the theory a self fulfilling prophesy. But I regard Gordon Long as one of the best, and he sees one more small rally before the edge of the cliff. So don't be surprised when it comes.

As to QE3, when and if. CHS makes a good argument that it won't work to add any pretense of recovery, and the Fed will lose prestige if it attempts it. Ilargi says in a comment here essentially that the Fed couldn't care less about that. Of course the real goal of QE was to transfer remaining assets from the middle class to the uber rich. CHS claims that this has already been done, the accounting simply isn't public. I use the analogy of a worker who had just been exposed to 1000 rads but is feeling great because its Saturday night and he has a date with a sexy girl.

The question of QE3, when and if, is only of real importance to day traders and spectators with their beer, popcorn, and a box of Depends on the coffee table in front of the couch. When the global finance train goes over the cliff into Deflationary Gulch, it won't make a tad of difference.

Yeah, bigger Boyz (but probably not the real Big Boyz) paying NY Mellon to hold your loot for a price is a hoot. Too bad there weren't more FRN Franklins around. It would be cheaper to just rent Fort Knox and pile them on top of the gold plated tungsten :-) These guys really think that holding "cash" in banks is safe and the FDIC is going to pay off in a timely fashion, meaning anything less than 30 years.

TSHTF when we get our first sovereign default out of the EMU and the CDS's are triggered. If Italy goes before Greece, it will be a head shot. In all likelihood, the largest writers of these suicide notes are the Squid and the Morgue.

He is certainly worth reading until he touches on domestic politics when he reverts to his Attila the Hun persona.

I find this true of many "Austrians." They are brilliant analysts of what's happening until they start making recommendations of any sort of remediation, at which point they all want to waterboard the poor and then feed the lions with the dazed remains.

This is really embarassing. I unintentionally switched the Emerald of the City with the Ruby of the Slippers. Sloppy work and there is just no excuse for it.

Regarding Cheryl's gender crisis, IMN provided a link to all of Cheryl's TAE posts, and the first half dozen of them are tantamount to a signed confession.

Cheryl is actually the anonymous 'husband' obliquely referenced in those early posts, and hawks stock to greater fools for a living. At one point he considered going straight, but the threat of losing his job as a consequence of honesty flipped him back to the dark side ... where he is now and eternally condemned to promote the benefits of excrement forever. Talk about Hell!

The Germans say "nein." No Italian bond purchases. If this turns out to be verified, then the mierda has just hit the ventilador. Monday should be another rollicking show. We may be seeing the new Mark soon, or at the least, the northern and southern euros.

With over 15 years in the plumbing business and as proud recipient of the Golden Sawzall Award, and though I never had a direct conversation with King Sisyphus, I can still say with some authority that it is better to push a giant rock up a hill than a giant turd.

And while perusing the English, International Spiegel for the original ZH article, I came across the following:

=========

As stock markets around the world tumbled Thursday , news came that the newly appointed head of the International Monetary Fund is under investigation by a French court on possible charges of misusing federal funds.

The court ordered an investigation Thursday into whether or not IMF Managing Director Christine Lagarde , then working as the French finance minister, misused public funds in a €285-million ($400-million) arbitration deal in 2008 with controversial tycoon Bernard Tapie. The deal has been criticized for giving too much taxpayer money to Tapie, a supporter of French President Nicolas Sarkozy.A senior French prosecutor requested the probe in May on suspicion that Lagarde overstepped her authority in allowing the deal to go through. Lagarde ordered that a dispute involving Tapie and Credit Lyonnais, a state-owned bank, be handled by an arbitration panel. The panel decided in favor of Tapie, and Lagarde did not appeal the decision to lower the amount.

Largarde has denied wrongdoing, and her attorney said the investigation was "in no way incompatible" with her position at the IMF. The investigation could end up taking months. If Lagarde were to be convicted in a trial, she could face up to 10 years in prison.

==========

It could be worse - it's only money - not even a half billion dollars- chump change. At least she didn't corrupt a 12 year old virgin - or at least one may hope until charges are filed.

Even more unfortunately, the purpose of an escape pod is to transport escapees to the nearest planet. As we are already on the nearest planet, the pods will take us nowhere. When the hyperdrive core explodes, we're boned.

Europe's growing balkanization and the U.S.'s credit erosion remind me that what is most valuable about our world is not what most think it to be. In a comment to his article, What are the Internet's dependencies? Raghavan writes: Even a smaller, less capable version of the Web seems to me critical in preserving civilization."

What strikes me is how provincial his "civilization" must be if it requires the internet. The essence of civilization lies in our being, not our surroundings or tools. One person's civilization usually requires another's slavery.

"The essence of civilization lies in our being, not our surroundings or tools."

Of course, the essence of our "financial" civilization is institutionalized and embedded in our collective consciousness, no doubt. Economics evolved in the context of warfare, deceit, theft, domination and is plagued with massive false assumptions and upheld with threats of violence. It's operation represents our world view - one that is quickly disintegrating - along with all it's falsehoods.

I told a person I know to sell all his stocks last month and I think he didnt listen to me and he is thinking that the market will rebound.Thanks to you guys my foresight is better than it was before.I should have sell something short but I didnt do that.I think a they are going to play a number on those that bought gold.Gold will probably go to 1900 or more but when it comes down it will be brutal.

Jack said...I told a person I know to sell all his stocks last month and I think he didnt listen to me and he is thinking that the market will rebound.

50% track record is actually good. I told most friends take out all money from the banks before Friday, and I think most (if not all) have no savings at all. Some of them make 5x the amount Me&Co. make.Go figure...

Hi p01I agree with about thatThan I would be in the game to shaft somebody.From the way it looks these people are doing nothing but shafting each other,Like gambler in Las Vegas.The only person that wins in Vegas are the Casino Owners.Are there any Gasino owners in this case

This has crossed my mind. I've been leaning towards Charles Hugh Smith's analysis/prediction for a while: a QE3 proper is unlikely.

But the stakes are so high--the whole shebang essentially. And so I do not put it past the-powers-that-be to try ANYTHING. Including complicity in a ratings downgrade. They may act shocked and outraged. But it may work in some respects like a QE without being a QE by chasing money out of US bonds, etc.

Then again, some are predicting precisely the opposite as it could precipitate a flight to safety.

The casino owners used to be the TBTF bank senior bond holders. But a rogue 17 year old quant genius developed a virus which endowed the robots with even greater greed than the owners, and since they were infinitely smarter, they took over. So now the casino owners are robots, and as forgiving as Ming the Merciless.

Also,

The fate of the global Ponzi now rests on Angela's broad shoulders. It is up to her whether the can gets one last boot down the road. She has the choice of delaying the inevitable by selling her people into total debt bondage (sort of like a reverse Moses). She is no dummy. You don't get a Ph.D. in quantum chemistry in a German university by being as stupid as the Decider. The pressure on her will be enormous. All the other G7 criminals (Obama, Harper, Sarko, Cameron, Bunga Bunga, Kan -just listing them makes me want to barf like a sea cucumber) will be demanding that she take a bullet for the New World Order even if it is her Götterdämmerung. Not to mention that very persuasive domestic gangster, Josef Ackermann. I am giving 4 to 1 odds at my local casino that Angela is going to cave. Then get out the fireworks and eat your shorts (for a few weeks or months anyway). I hope that a quality video with audio goes up on youtube when Deutsche Bank does a swan dive from the top of their Frankfurt am Main HQ into the concrete. I want to savor the splatttt.

Part 1 : So someone on the US team ( Krugman as it so happens in this instance ) is finally taking pot shots at Standard & Poors. I wondered when it would occur to someone to shoot the messenger. Better late than never I suppose. Who are these S & P guys, anyway ? By that I mean, who are their masters ?

Part 2 : If I ran a Stock Market that was 75% computer algorithm operated then you could damned well count on me having a 100% detailed understanding of the EXACT algorithms being used by everyone who bellied up to my gaming tables. I would have to.

I would recognize the absolute Need-To-Know every variable, formula and trigger value of every buy & sell program ( especially sovereign bonds ). And YES I mean to imply that I would hack, bribe, burgal, extort and infiltrate to whatever degree necessary to obtain that crucial intelligence... because it IS crucial info, and my casino would not survive for long without it.

Otherwise, how could I game the system ? Without that knowledge I would be skinned by my competitors in about 2 petaflops of a lamb's tail... which is to say, way fast.

Since that is what they would have to be doing, that is what they are doing

Sorry if that sounds too too paranoid, but could YOU justify being ( for instance ) Director of the NSA or CIA ( or the NYSE for that matter ) WITHOUT that knowledge ?

This is the economy of the so-called Free World we're talking about here. You would just leave that to chance and the honor system?

Oh don't look so shocked and skeptical! It's just Crime & Skulduggery. What's new or shocking about that?

If it makes it any easier, just think of it as a specialized form of insider trading.

If I'm even partially accurate in these estimations then the Stock Market is just a very large simulation... that both steadies the field of play, and pays for itself by vacuuming out the pockets of the faithful who go there to prey.

Who is more corrupt that the other.I think they are having a race amongst themsleves to have the corruptest of them all trophy.Canadian leader Harper said they spent 1 billion dollars to prepare for the G8 summit that was held here a while ago.I dont know about you but 1 billion seems like out of this world.It does not that much to figure this out that with a few million you get can organize something like that.Where did the rest go Maybe switzerland or just direct deposit into a canadian bank

Hmmm, very interesting comments here from Ian Welsh regarding the S&P downgrade of the US:

However, Obama and Democrats refused to destroy S&P when they had the opportunity and every reason to do so. The submprime crisis could not have been nearly as bad without S&P and the other rating’s agencies rating trash AAA so that investors who must buy AAA by law could do so. To put it simply, S&P engaged in systematic fraud. They, like everyone on Wall Street and in the major banks, have not been indicted for this. The choice to not indict is policy. Obama’s policy.

If Obama did not want this to happen, it would not happen. Could you imagine what LBJ, Nixon or Truman (or, hell, Bush Jr.) would have done if a rating’s agency tried this? The President has the necessary tools to utterly destroy S&P and every senior analyst working for them. You could use terrorism statutes or RICO, just as two examples. Send the FBI into their offices, seize all the assets of both the company and everyone working for it, and then got through their records. I guarantee, as absolutely as the sun will rise tomorrow morning, that there is enough evidence of fraud in those records to put them away for life. In the meantime, RICO laws are used to seize all the assets of everyone involved, meaning they will be using public defenders (don’t like a bad law? Use it against real people.) When S&P informed the White House they were going to downgrade, the White House could have quietly let them know what the consequences would be.

This is another manufactured crisis, on top of the original manufactured debt ceiling crisis. The oligarchy wants the opportunity to buy federal assets at dimes on the dollar. They believe they don’t need the poor or middle class anymore, so they are good with getting rid of SS and Medicare. And Obama is, as he always has been, onside with this.

These people, are, however, playing with fire. Just because it’s a crisis that didn’t have to happen, a crisis, that is manufactured as another looting opportunity, doesn’t mean that it won’t have real consequences.

It seems we are trapped outside of an impervious sphere of political kabuki.

The court ordered an investigation Thursday into whether or not IMF Managing Director Christine Lagarde , then working as the French finance minister, misused public funds in a €285-million ($400-million) arbitration deal in 2008 with controversial tycoon Bernard Tapie. The deal has been criticised for giving too much taxpayer money to Tapie, a supporter of French President Nicolas Sarkozy.

Oh, the delicious irony of it all.

Let us get some facts straight. Bernard Tapie is quite an amazing guy and was the most popular person in France for a long time. Crédit Lyonnais bank had undoubtedly ripped him off when it sold Adidas (which he owned) on his behalf. At that time, they had seriously crooked management. It seems that he made a deal with Sarkozy, the French President, to support him politically (by making a 180 degree turn in his party's political affiliations) in return for Sarkozy not appealing a monster compensation bill payable by the government to Tapie. Lagarde was the French finance minister at that time and fully cognisant of this "deal".

Now, it seems that she is about to be blown out of the water for making this deal - which is a direct threat to Sarkozy since she only did what he wanted her to do. What I am getting at is that it would seem to me that by short-term betraying his political supporters, Tapie may well have destroyed what is left of Sarkozy's credibility.

It is important to understand that in France, politics is totally run on money. The big money comes from Africa. Every country in Africa that has French troops protecting its incumbent president is paying massive amounts of money to the French political system (except for the communists). The prime example is Gabon - an oil-rich country where most people are desperately poor. The money is paid to the main political parties and secret services in France and into foreign bank accounts. This has been going on for decades and there is nothing secret about it. The Elf Affaire revealed just a tiny part of this complex mechanism.

Skip Breakfast said:But it may work in some respects like a QE without being a QE by chasing money out of US bonds, etc.

If the sign reads no ducks allowed, what do you do with an animal that quacks like a duck and walks like a duck? You paint it like a swan. In black.Archie's link makes an excellent point that S&P could have been RICOed at any moment.This is QE3 in disquise. QE3 would have backfired 100%. This one stands only about 90% chance of backfiring.The stakes are at the highest level they have EVER been in mankind's all history. This is planned. Poorly, but planned.

Another example of how crazy it gets in America is that guy Garner, torturer of Abu Graib fame, walks free to-day, happily married to an accomplice in the torture regime while Bradley Manning remains in custody and rumours are he is being psychologically tortured. I do hope the Iraqis make it a priority to find Mr. and Mrs. Garner. It still matters to me that justice be seen to be done.The US administration does not understand that that Abu Graib horror will not be forgotten.Not in Iraq, not in Canada, nowhere on the planet.

I am rarely one to throw cold water on a good conspiracy theory ;-) and particularly one that would involve the USG. And Eric Placeholder could nail any of the big three rating agencies on criminal fraud in about 5 minutes for putting AAA lipstick on toxic waste pigs. He doesn't even need RICO, just straight criminal fraud. So no argument that the USG could have stopped the S&P downgrade in a heartbeat.

But I just don't see it as a QE3 substitute. I don't think it is going to chase any bond money back into risk assets with the whole global Ponzi riding on Merkel's decision whether to sell the Germans into debt slavery by buying Italian bonds. Furthermore, of the three major agencies, only S&P downgraded, leaving Fitch and Moody's with top ratings, so there is no fiduciary duty for any companies to dump the bonds - it's a hung jury. It's all psychological. Since the Fed has huge illegal puts on its own treasuries, to keep the interest rates near zero, they are certainly playing with explosives. The Fed could wind up as a large crater.

The purpose of QE's is deliberate inflation which weakens the dollar for the global race to the bottom and allows the Big Boys and the HFT to levitate the risk market, particularly stocks, with the excess liquidity. It also gives the Obama regime the appearance to the naive and/or stupid of a green shoots recovery, though that is getting a little stale by now. But the real purpose of ZIRP and QE is to force the pension funds and 401-k managers into the stock market since they are getting no interest in the treasury markets and they would starve to death there.

While the Boyz are making some money churning the market, the big money will be made crashing the market as long as the right people are holding what Stoneleigh would refer to as the empty bags. Also Primary Dealers (read Da Boyz) have (for some strange reason) the legal technical right to naked short the market. That is how the gangland execution of Lehman was accomplished. So we may now be seeing the end game digitally transferring the pensions to the Owners.

You know the old saw that democracy is when two wolves and a sheep decide to vote on what's for dinner. The Morgue and the Squid decided to put the sheep on tomorrows menu and eat two fellow wolves first, namely Lehman and Bear Sterns.

I see the primary purpose of the S&P downgrade as just disinformation for the Usakistani (former) consumerate, that things are serious so it's time to give up Social Security and Medicare when the new Politburo (supercongress) makes the move. The $2.5T SS lockbox (that they picked from workingman's pocket) can then be moved into the elite's accounts.

So if someone can make a strong case how this minor downgrade is going to scare serious money out of Treasuries and into stocks, thus imitating the effects of QE3, please do so. And Cheryl, sober up and shave before you comment.

This is a very strange time,its seems.We at TAE have watched while the "Evil actions" in high places has exploded....by several factors of ten.I honestly thought that it could not last this long...meaning TPTB, have succeeded in wiring it together ,sort of..until now.

I think it may well be over... Look out below..........

That seemed to be the consensus evaluation of the information from Germany at that linked story..

Its over.

Either Germany bite the big one and takes out a whole boat load of bad debt...swallows and smiles as they are put in hock for the lifetime of all living now..Or they lite the fuse that will blow the hell out of euro-land

Or the fed does something really,really stupid....Getting us involved in something that is a for-real no-win..putting the long suffering US taxpayer,[the golden cow]"on the barby"in the interest of European "stupid money" If they do,the result might end up folks here hunting politicians with dogs...after they finish with the bankers.... Folks are being advised ,quietly,that we are at the start of another Depression....

Should we do something dumb with the military,like hit Iran,or other serious miscalculation,I will be fairly certain it will be a "Bright Shiny,look here!!!To draw attention away from the terrible truth that the country is dead-broke,and we are all screwed beyond description.

If US treasuries are not the safest place in the world for Chinese savings anymore, I believe that gold might be the alternative option from their point of view, but the US who holds large tons of gold should start selling secretly their gold to calm the gold market and continue pretending that there is no alternative to saving in US treasuries.

I didn't spot anyone recently writing about the Fed's manipulation towards the end of their tenure. Is it only a fantasy that they only have a legal charter for 99years from Dec 1913 and are therefore deliberately creating a crisis which should culminate in collapse circa Aug 2012?

The speculation is that the stunned sheeple will beg the outgoing Fed to lead them out of societal disarray, by forming the Nu-Fed with unprecedented power and a longer charter.

The S&P decision is timely, but I highly doubt it was orchestrated by the USG to support the stock market or otherwise. That reminds me of the theory that Wikileaks is one big government psy-op... if it was, it would have to be one of the stupidest psy-ops ever imagined. Similarly, there is absolutely no precedent to suggest that downgrading US sovereign debt, the safest haven in the world right now, would somehow boost risk assets such as stocks. There is every reason to think that the opposite would occur, either via increased flight to safety or a bond market dislocation. Whichever one occurs, it's time to turn that risk off! QE is much less likely to backfire.

The fact that the S&P move is not seen as a major threat to the USG/Fed does not mean it was orchestrated by them. Raiding the offices of S&P and launching criminal prosecutions would probably be seen as being even more damaging to public perception of the USG than the downgrade itself, which as EL G noted, was only done by one agency of several. No doubt there are people working around the clock within the government and financial board rooms to spin the development in their favor, and to aid the austerity/privatization process. At the same time, I think S&P has placed itself on a few shit lists, and will remain there unless it somehow makes up for being "naughty".

It never ceases to amaze me that the defining fact of the 'Main Story Of The Day' is ALWAYS missed.

So what is THE take away message of the S&P downgrade of the U.S. credit rating?

Simply this : That an anonymous committee of no-names in a private company that 99% of Americans don't even know exists were able to kick the USA squarely between the legs and nobody did nothin' about it. No prevention. No retaliation. Nothing.

This was not a sucker punch. They announced that they would do it. They telegraphed the hit 12 hours in advance, and then they just up and DID it in full public view with the cameras rolling... and then stood back and snickered in absolute confidence that there would be no counter measures of any kind whatsoever.

Even the vaunted Ian Welsh misses the point, although, to give credit where it is due, Welsh came closer than anyone else. The point is that the people who did this were SO much more powerful than the combined forces of the world's sole super-power that they could bitch slap the United States of America and then just turn their backs.

Picture yourself doing that ( assuming... despite gales of hysterical laughter... that any of us had the capacity to put that much hurt onto anything that big )

How long before a Seal Team lands a chopper in your backyard, snaps a couple of head shots into your brain and dumps the remains at sea?

I will repeat an earlier question. Who the hell are these Standard & Poors jokers, and who do they work for ?

Names and addresses, employers and job description. We're not talking about gods, here. We're talking about plain old homo saps, who pull their pants on one leg at a time, just like we do.

The internet is at our fingertips. Finding out is just not that hard to do.

Even those adolescents over at Anonymous know that step one of self defense is to 'out' the bad guys. Put names and faces ( plus addresses, social security numbers and bank account passwords while you're at it ) to the faceless boogeyman and he ain't half as scary as when he is killing you off by the millions with Financial Predator Drones.

This information has immediate, practical and relevant-to-daily-life importance to even such insignificant serfs as ourselves. At the very least it hangs a sign on EXACTLY who not to trust.

Generality has its uses. It narrows the search down to manageable proportions. But to end it at that level and grind away at the analysis of vast macro-systems is a waste of time for those who do not have comparably vast macro-resources at our disposal.

We can't DO anything about "The Bankers." The term is just a silly little linguistic convenience that enables us to label a topic of conversation.

Actions are committed by PEOPLE, not nomenclature, and people have names, addresses and more or less visible means of support.

So, who are these S&P people, who do they work for, why does that make them feel so invincible lately ?

They must believe that they have an unchallengeable upper hand. What is that hand and WHO are they playing it for ? Names if you can, please.

@AdvanceHeating, you add yet another spin to events by underscoring the Fed 99 yr charter. Could such a transparent limitation be a major driver of events? Possibly...Is a renewal mechanism contained in the charter?

@DBS, re naming names, I recall a chart posted recently showing who holds US Treasuries. 46% of the distribution was foreign, a mix of foreign gov'ts and private. When foreigners hold 46% of your treasuries I would conclude you can no longer call yourself independent. In other words the US has lost its sovereignty. I share your interest in who is calling the shots now. If I can find that chart I'll post it.

Ash, the USG is not some monolithic group with a uniform goal. It's a tool for gaining wealth and power that factions of elite strategically game over. Using things like this to sway public opinion for one reason or another.

Obviously it was orchestrated for a purpose other than trying to be the best ratings agency ever.

We can all agree on that, I think

This is what I meant about infighting amongst the elite. Somebody is mad they are not getting their cut. And/Or It was a political hit against the Obama admin.

D. Benton Smith said "The internet is at our fingertips. Finding out is just not that hard to do."So if using the Internet is easy, then did you find the answers to your questions who are these Standard & Poors jokers, and who do they work for?

"Geez, seems like the OA has bent over backwards to be accomodating. What do they want, instant confiscation of all pension plans by Presidential dictat?""

haha Of course, he has. But, for everybody? We are talking about a group of hyper-acquisitive, narcissistic personalities. Somebody did not get a big enough piece of the pie - which is a theme I expect to play out more as the pie shrinks. Which then will be filtered through a population palatable narrative. Then erroneously be spun by the conspiracy crowd as a "grand plan". Or I could be wrong;)

The US debt has already passed the point where it is unpayable in dollars of current purchasing power. So what the S&P did was simply an emperor's new clothes ploy though I would agree that their motives were not simply childlike naivety. I entered this discussion just pointing out that it can in no way be considered a QE3 substitute. I agree that the Obama Administration could have stopped it if they wanted to. I regard it as simply another piece of propaganda to scare the consumerate into accepting that we need massive self-sacrifice to right the national ship and the patriotic thing would be to self-immolate oneself to save the giant banks. And if we don't want to self-immolate, well they can and will do the job for us.

Arggh! My internet has decided to run at less than dial-up speeds for the last day just when things are getting interesting.

"I keep hearing people erroneously claim that China is funding US deficit spending. It seems that every eejit with a fundamental misunderstanding of mathematics (and access to Xtranormal‘s animated talking bears) has been pushing this concept.

It turns out to be only partially true — and by partially, I mean 7.5% true. But that means the statement is 92.5% false.

The biggest holders of US debt are American individuals, institutions, and Social Security. We own more than 2 out of every 3 dollars of US debt — about over 67%. Hence, we depend far less on the kindness of strangers than you might imagine if your listen to the intertubes."

"Obviously it was orchestrated for a purpose other than trying to be the best ratings agency ever.

We can all agree on that, I think

This is what I meant about infighting amongst the elite. Somebody is mad they are not getting their cut. And/Or It was a political hit against the Obama admin."

I do agree with your general line of thinking. When I said "USG", I was using it in it's most common definition right now, meaning basically the executive department of the US federal government, and specifically Obama and his cabinet. Within the definition of "cabinet", I would not necessarily include the CIA director (and corollary heads of intelligence agencies) or even the Joint Chiefs and their immediate inferiors. It's really difficult to figure out at any one moment whether the people technically working for Obama are actually coordinating decisions against his interest (such as the S&P downgrade), but we can be sure that such people have existed and continue to exist. We live in a world of agents, double-agents and double-agents who have been exposed and flipped into triple-agents, at the very least. Presidents and Prime Ministers themselves may have accepted that they cannot continue on in their current positions, and therefore are working "against their own interests", in terms of getting re-elected.

I don't know, though, and don't pretend to know. I have my opinions, but they are pure speculation based on the most circumstantial. Which, to speak to DBS' point, makes it useful to speak about institutions in generalities, IMO, when advocating arguments with more certainty. The institutions represent a mode of operation which is endorsed by various individuals over time, but is really unspecific to any of them. Seemingly homogeneous institutions may diverge in their strategies from time to time, both within and between institutions, which is especially true in these contractionary times, but we can always rule out certain strategies as being unlikely for many of the major factions to pursue despite their differences.

IMO, the downgrade is most likely one of those other effects that we see in a dying system - an entrenched player not doing what it's supposed to, for some as of yet unknown reason. Perhaps S&P has been infiltrated by Chinese and Russian elements seeking to gain financial leverage over the USD-based factions of the financial elite, without shaking up the debt-dollar system too much. I really don't know, and I realize I'm probably deep in the minority of people here with my general opinion, if not the only person. It also seems that US factions have been able to conduct a good deal of "damage control" in their response. I agree that it also presents a good opportunity for them to further their entitlement austerity agenda. If there is one thing the big wigs with resources are pretty good at, it's improvising. I just don't see the decisions as being initially orchestrated by either the "left", "middle" or "right"-wing elite of the USD-based factions, as a part of some much larger plan.

This shit is getting dicey right now. SA may be right that it's an internal elite faction going after Obama and his crew, but that would still carry a significant amount of risk to accomplish something that is naturally occurring anyway. But, as he said, when the pie is shrinking, those risks may be perceived as worth it. So basically my answer to DBS' question, "who are these S&P jokers?", is that "I have no clue, but I have a decent idea of who they are not". It's not Obama's administration, IMO, and certainly not anyone trying to goose the stock markets.

The prose is a little rough 'cause this is a rush job... but a clear picture emerges nonetheless.

All leads point to India & China, via our own favorite son: McGraw-Hill.

S& P President, Devan Sharma, (graduate of Birla Institute of Technology, Ranchi, India) is President of the 'US-India Business Council.' S& P is owned by the almost-too-big-to-describe McGraw-Hill conglomerate.

McGraw-Hill owns United Tecchnologies Industries, which as one of the top 10 defense contractors ( Sikosrsky/Apache Helicopters, Pratt & Whitney Engines, and numerous missile systems ) has the bulk of its manufacturing capacity based in India... as do several other McGraw-Hill subsidiaries like 'Carrier' ( which does air conditioners and heating.)

Chairman, President, CEO and 18% owner of McGraw-Hill is none other than Harold McGraw III . Amongst numerous other nefarious hobbies McGraw III is Chairman of the US-India Business Council ( Sharma is Pres, McGraw is Chair.. how cozy. ) As previous chairman of the International Trade & Investment Task Force McGraw was prime movers of that Free Trade bullshit that off-shored American jobs to India in the first place, and a big time Republican campaign contributor with few equals.

India's news media parroted ( and I do mean VERBATIM ) China's highly critical remarks about the US now needing to cut its domestic spending to get deficits under control.

So, J'accuse McGraw and Sharma for the S&P caper based on their interests in increasing the profit margin of McGraw-Hills' too-Numerous-To-Easily-List products which they can now manufacture even more cheaply in India, take profit in dollars and pay no tax. Sweet.

Benefits to India include increased volume and profit of exports to the US... paid of course in dollars, and maybe even a little upward bump in the desirability of India's still triple-A rated bonds over the now tarnished T-Bills.

Benefits to China include increased trade with India denominated in Juan/Rupees, further undermining of the Dollar as world Reserve Currency, and a chance to take a free shot at those assholes in Washington.

Triple whammy. A true Hat Trick.

No wonder the U.S. took the public flogging laying down. Their knees were too weak to stand up.

And August the 8th shall ne'er go by, From this day to the ending of the world, But we in it shall be remembered- We few, we happy few, we band of sisters; For he to-day that sheds his dollars with me Shall be my brother; be he ne'er so vile, This day shall gentle his condition: And gentlemen in England now a-bed Shall think themselves accursed they were not here, And hold their manhoods cheap whiles any speaks That fought with us upon August the 8th."

Listen here. I've never played it safein spite of what the critics say.Ask my imaginary brother, that waif, that childhood best friend who comes to playdress-up and stick-up and jacks and Pick-Up-Sticks, bike downtown, stick out tongues at the Catholics.

Or form a Piss Club where we all goin the bushes and peek at each other's sex.Pop-gunning the street lights like crows.Not knowing what to do with funny Kotexso wearing it in our school shoes. Friend, friend, spooking my lonely hours you were there, but pretend.

3) People who wish to end or weaken the USD as the reserve currency as an aid to the NWO (Rothschild, Rockefeller, and the usual suspects).

4) People who want to help crash the risk markets (commodities and equities). Counterintuitively this will increase the desire to get out of risk and to get into cash or cash equivalents which include short term US treasury bills.

5) Dumb precious metal bugs, though this may backfire over the short to mid term as they will sink as a commodity as Stoneleigh has predicted once the SHTF.

Actually, I am much more interested in the EMU than the AA+ which I regard more as a distraction. It's all bullshit. Brought to you by the same people who stamp USDA grade A on pig turds. Actually the Vulture Capital Rating Agency is coming out tomorrow rating the USA debt as BB which is more in touch with reality and I will hand the emperor a jock strap. Have we no decency?

Souperman2

You judging the Fed as an Usakistani institution with your numbers? Hmmm. Who really owns it? Quite literally. It is a private corporation, but one must dig beneath the surface.

So now that we can generate a Muckety map of just about any powerful person and corporation and its related associations, why did the S&P downgrade the U.S., at this point in time? Why not before the debt ceiling debate? Why not in October? Why now? I assume we shall be finding out soon.

The G20 are meeting this evening via a teleconference. So tell me again why Canada spent one billion dollars to entertain these leaders?Seems they know how to use a telephone afterall. Anyway I think the best plan forward for the G20 is to pull an Irish as in the Irish gov't guaranteeing all bank debt. I just don't see any political leaders willing to throw any financial institutions under the bus. Much more willing to sacrifice the citizenry.

@Lautturi, enough of the sauna already:) Things are getting interesting. Our concern about the EU stability fund is already history, dead in the water before it saw any action.

Presidents and Prime Ministers themselves may have accepted that they cannot continue on in their current positions, and therefore are working "against their own interests", in terms of getting re-elected.

Not here in Australia. The people (5:2) don't see why the Palestinians should not have their own country but, their leadership thinks otherwise.

""This shit is getting dicey right now. SA may be right that it's an internal elite faction going after Obama and his crew, but that would still carry a significant amount of risk to accomplish something that is naturally occurring anyway. But, as he said, when the pie is shrinking, those risks may be perceived as worth it. ""

I assume risk assessment is different for seriously hubristic, wealth addicts. There is desperation in the air. As clever as they may be, they are what they are. The political world of the status quo is up against irresistible change as their environment is dramatically changing daily. Frankly, I don't think they will be able to modify their behavior in any meaningful way, just as a shark cant control itself in a feeding frenzy. I actually look forward to their implosion from lack of control.

This NWO "grand plan" narrative only serves as a fog machine for real politik and the machinations of global capitalism. As well as kind of a status quo protection mechanism.

The real truth of the matter is, nobody is in control, though lots of entities seek control - to get "control' comes with tremendous aggravation and potentially self-destruction in a collapse scenario. Actually, applying rational analysis to their actions is almost futile, because gaming for control of the titanic is not

The government spent more than 10 billion yen in the last 25 years to develop the radiation dispersion simulation system called SPEEDI (the System for Prediction of Environmental Emergency Dose Information), but they hid the simulation results from the public and did not let local residents know the risks.

5) Dumb precious metal bugs, though this may backfire over the short to mid term as they will sink as a commodity as Stoneleigh has predicted once the SHTF.

I can see a down pressure on PM's in covering a market drop , but weakness in that regrd might be more than offset by those seeking a 'safe haven' in the smaller harbour of gold - A small gold goblet fills faster than a supersize leaky paper bucket- Anyway short to mid term doesn't matter as lontg as one can afford to be fearfully, long, long, long. I hope you are not speculating and are long as well.

Hi El GI still need help figuring this outIf the crash was here than what would happenTell me if I am right.1. The stock market tumbles2. The dollar goes to zero3. Gold hit new highsI still need help understanding this

""The people (5:2) don't see why the Palestinians should not have their own country but, their leadership thinks otherwise.""

The Israeli biased media bubble fades the further you go away from the states. Keeping the American people in the dark about this situation is key to certain interests.

"peace propaganda and the promised land"http://www.youtube.com/watch?v=ycgi0hUihCs

Israel is a 19th century colonial project. It's an anachronism. This is another country heading for destruction though it's inability to control itself. She seems content on becoming a full-fledged apartheid state. That, or they are seeking a final solution for the Palestinian problem.

SecularAnimist said...The real truth of the matter is, nobody is in control

Yes, it's true, I am in control. That SA is one sharp cookie to figure it out. You may be asking, if that is so why I am letting all these terrible things happen. Well, it's also true that you can't make omelettes without breaking eggs. I am letting the wankers destroy each other so that I won't have to redeploy the entire US Military to do it.

>>IMO, the downgrade is most likely one of those other effects that we see in a dying system - an entrenched player not doing what it's supposed to, for some as of yet unknown reason.<<

What makes you so sure the downgrade isn't according to plan?

It makes perfect sense within my paradigm.

They know they can't inflate forever without crashing the debt-dollar.

The entire point of their predatory lending (inflation) is to eventually bust the debtors and take their assets... AND THEIR NATION STATE.

Credit downgrades and "Council of 13" unconstitutional government changes simply foreshadows the PLANNED austerity that will transfer the title of America over to their new financial over lord dictators.

Some call it a New World Order, but the name is unimportant.

The reality, however, is very important.

"Everything that has transpired has done so according to my design..."~Emperor Palpatine

Your paradigm is that the destruction of the system is some grand design rather than it's inherent irreconcilable contradictions that social theorists have been warning about for over a century. And are quite obvious from many different angles including a scientific analysis of the debt-energy interplay. Something built on institutionalized false assumptions and systemic contradictions, can't last.

"The entire point of their predatory lending (inflation) is to eventually bust the debtors and take their assets... AND THEIR NATION STATE."

There is no point beyond being the logic of the system. Which logic is that of destroying itself. Of course, this is followed by revolution and the leveling impulses of the propertyless multitude. It can't end any other way in a wealth and property concentration system. It's the inevitable end-game where the winners lose.

""Some call it a New World Order, but the name is unimportant.""

Originally, a far-right and fundamentalist conspiracy which overlapped with the "red scare" of the 50s and brought back to life with the internet.

It's a comic book version of reality. This does not mean there is not a constant state of conspiring for wealth and power. It's true, the history of history is one conspiracy after another. So the idea that their is one over-arching conspiracy is true in the abstract. But all just tendencies of a system predicated on strategic gaming for power.

I've seen a lot of complex speculation here about the S&P downgrade. What about the idea that this is all about selling austerity in the USA?

The S&P states:

"We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process," the ratings firm said.

This is exactly how they attempt to implement austerity in Europe, why not use it here? They lay out the debt problem in terms of public spending on entitlements. We know austerity is suicide for growth and countries in debt, but the objective is NOT managing a debt problem. The objective is wealth transfer. A shuffling of private losses onto us by stealing/redirecting our tax dollars to corporate bailouts as they become more necessary. I believe it is time the power elite are leveraging for. Time allows for more wealth to transfer before it disappears into the storm of deflation. It's hard to steal wealth when it has ceased to exist. Any thoughts?

* The Fed will avoid QE3 because they know it will fail; Wimpy half measures appear engaging and garner no blame; The Fed doesn't care about blame, it has other fish to fry

* Armies will be used against their own people; I, do solemnly swear that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; With luck some will either understand or break their oath

* The hallmarks of poverty abound; Consumerism isn't making Americans happy; Rumblings are coming from everywhere

* The media distracts more than it informs; Never join a retirement program, join a ponzi scheme or buy a timeshare; The city of Paris may sell flats

* Will there be bloodbath on Monday? History has been out back taking a leak but will be in soon; All quiet on the western front; And what rough beast, its hour come round at last, Slouches towards Bethlehem to be born?

* Now that he has been outed Bernanke will distribute diplomas to the scarecrows, pocket watches to the tin men and will next generate the hot air needed to refill his balloon

* Amerika is a Schuldenpranger; US Debt is unpayable in dollars; The US might sell gold to make treasuries look more attractive; AA+ either is or isn't QE3

* The downgrade will be great for equities; The Columbia is on the launch pad; Manuel can soon afford his own yellow Cougar; Once more unto the breach, dear friends, once more; Or close Wall Street up with our Fiscal dead.

When Barack Obama stepped into the Oval Office, he stepped into a cycle of American history, best exemplified by F.D.R. and his distant cousin, Teddy. After a great technological revolution or a major economic transition, as when America changed from a nation of farmers to an urban industrial one, there is often a period of great concentration of wealth, and with it, a concentration of power in the wealthy. That’s what we saw in 1928, and that’s what we see today. At some point that power is exercised so injudiciously, and the lives of so many become so unbearable, that a period of reform ensues — and a charismatic reformer emerges to lead that renewal. In that sense, Teddy Roosevelt started the cycle of reform his cousin picked up 30 years later, as he began efforts to bust the trusts and regulate the railroads, exercise federal power over the banks and the nation’s food supply, and protect America’s land and wildlife, creating the modern environmental movement.

Those were the shoes — that was the historic role — that Americans elected Barack Obama to fill. The president is fond of referring to “the arc of history,” paraphrasing the Rev. Dr. Martin Luther King Jr.’s famous statement that “the arc of the moral universe is long, but it bends toward justice.” But with his deep-seated aversion to conflict and his profound failure to understand bully dynamics — in which conciliation is always the wrong course of action, because bullies perceive it as weakness and just punch harder the next time — he has broken that arc and has likely bent it backward for at least a generation.

[snip]

But the arc of history does not bend toward justice through capitulation cast as compromise. It does not bend when 400 people control more of the wealth than 150 million of their fellow Americans. It does not bend when the average middle-class family has seen its income stagnate over the last 30 years while the richest 1 percent has seen its income rise astronomically. It does not bend when we cut the fixed incomes of our parents and grandparents so hedge fund managers can keep their 15 percent tax rates. It does not bend when only one side in negotiations between workers and their bosses is allowed representation. And it does not bend when, as political scientists have shown, it is not public opinion but the opinions of the wealthy that predict the votes of the Senate. The arc of history can bend only so far before it breaks.

>>Your paradigm is that the destruction of the system is some grand design rather than it's inherent irreconcilable contradictions that social theorists have been warning about for over a century.<<

Of course it was by design. Just because you don't understand the design doesn't mean it doesn't exist. I've already explained the basis of the design, but you don't listen.

BFC created the world's largest credit bubble in human history AND DID SO CRIMINALLY - they KNOWINGLY broke the simple wording of Section 2a of the Federal Reserve Act LAW.

They KNOWINGLY lie about what that mandate is, so people like you will try and tell others its all some kind of accident or random, unforeseeable event due to a myriad of undefined conspiracies (read - nobody can be held accountable).

Every bubble in human history as always collapsed - AND THEY KNOW IT! The act of creating the world's biggest bubble means they knew they were creating the world's biggest bust in human history.

It always happens. Every time. 100%.

The criminals use their control of media to condition people to believe nobody can be blamed - cui bono?

>>Originally, a far-right and fundamentalist conspiracy which overlapped with the "red scare" of the 50s and brought back to life with the internet.

It's a comic book version of reality.<<

Study logical fallacy - your statement is a completely worthless waste of words given that you don't address any the data that drives your conclusion.

go to the Fed's Z1 report. God to the BEA GDP table. Do the analysis to see for yourself if the Federal Reserve broke the law by taking monetary and credit aggregates PARABOLIC to GDP CONTRARY TO THE LAW.

Where is the media protecting us from these criminals (beyond all doubt)? Where is government protecting us from these criminals (beyond all doubt)?

I understand it is uncomfortable realizing that those who run the government are purposefully undermining the country.

It is real. That's all that matters to me.

Ad hominem won't fix it. Avoidance won't fix it.

PS - and no, I'm not saying there is a monolithic conspiracy where everyone always meets in a room. At the top there is some agreement on major issues and they us ECONOMICS to control the people below.

When I mention BFC / Central State drug running, gun running and money laundering operations to people in the military, they don't deny it and tell me that I'm crazy - BECAUSE THEY KNOW. But economics keep them in check.

And yes, I can source it all - that's why I have the view they are running much of the drug trade. It is off topic to this issue, though, and this post is getting long. If you want the source, do tell, I will provide.

>>Armies will be used against their own people; I, do solemnly swear that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; With luck some will either understand or break their oath<<

No! Don't break the oath! KEEP IT!

Understand it first, THEN KEEP IT! Do not follow illegal, unconstitutional orders.

Throw the criminals who methodically eliminate OUR INALIENABLE Constitutional civil liberties in jail where they belong.

>>The way I see it is that the 18 big banks are in control and they are playing around with people like toys.<<

WHO controls the mega banks? They are the ones in REAL control. Don't look to the corporate fronts, look to the OWNERS of those corporate fronts.

@Resist,

EXACTLY! They changed our form of government, for goodness sakes! The Council of 13 (hand picked by BFC controlled lobby cash) isn't Constitutional!

While some like SA would argue that the Council of 13 "just happened out of some kind of randomness," I assure you, it was planned out in the back room somewhere AND IT WAS CREATED TO ACHIEVE CERTAIN GOALS THAT WEREN'T AS EASILY ACHIEVED WITHOUT IT.

They need "other events" to cram poverty down the throats of armed, debt saturated Americans.

They are working on the "armed" part by sending guns to their chosen drug cartels to escalate the violence in order to fight back the competition and to demonize the 2nd amendment and restrict gun ownership going forward.

People who don't know all the pieces can't put them all together.

the problem is that the controlled media tells people without the pieces that they already know it all, which is music to their ears.

"Of course it was by design. Just because you don't understand the design doesn't mean it doesn't exist. I've already explained the basis of the design, but you don't listen."

Right, 18th century plutocrats were scheming on the time when peak oil came to implement a "global government" to control the world by inventing neoclassical economics which is fundamentally flawed and would have to eventually collapse Yeah. That is what happened.

The NWO is going to be 19th century capitalism with no safety nets, entitlements or workers rights and a large underclass that needs to be managed. Unless you do something about it, which is NOT warning of some secret cabal's plan. It's a redesign of a fundamentally flawed system - that happens to be global.

Pointing out that our economy is going to crash or that some serious austerity is coming to town, is a no-brainer. As is pointing out some are planning for it. Corruption and crisis is a feature of the this fundamentally flawed system. Until you understand that you are lost in a world of misplacing cause and effect.

So basically, welcome to capitalism and the nation state design the supports it, where the monied elite control everything and government is in the business of supporting them. The system is working as designed - perfectly.

It has never been more obvious that America is an ossified dying empire with a suicidal inertia that no leader or movement can stop. If Sarah Palin, Dennis Kucinich, or Hanna Montana were president, the system that the president pretends to run would still be bailing out banks and insurance companies, escalating wars, hiding atrocities , and generally chugging along to its ruin.

What would happen if you swapped out the bank executives , the generals, the billionaires? Nothing. It doesn't matter who you plug into the role of dog catcher -- the dog catcher still has to catch dogs, and every role in a domination system must channel domination. Ultimately there is no boss. At the top of the pyramid sits the logic of the pyramid itself. And that logic is basically a big fire that consumes everything and finally burns out.

"Credit downgrades and "Council of 13" unconstitutional government changes simply foreshadows the PLANNED austerity that will transfer the title of America over to their new financial over lord dictators."

IMO your assertion would make more sense if the "overlords" were trying to crash the USD via HI, as many of the NWO theorists argue. Obama is just a puppet of the evil global "socialists" who are ready to implement a new IMF-sponsored global currency, and what not. If they want to transfer wealth via deflation, on the other hand, then it would be rather foolish to downgrade US debt. Just stop massive intervention by Congress and the Fed, and you get massive deflation. If Obama and Bernanke are in your pocket, planned austerity isn't a problem. The China/India explanation by DBS makes the most sense to me right now (at least certain factions of those countries), and I'd throw in Russia as being on board, esp given Putin's recent comments about the US. But, even that raises some troubling questions in my mind. I'll have to ponder it some more.

Regardless of whoever is ultimately responsible for the downgrade decision, though, they obviously didn't mind a global market rout today and tomorrow. Let's see what our "fearless" leaders pull out of their collective arse... my guess is that, unless the ECB gets Merkel to cave on expanding the EFSF or starts an all-out monetization program, targeting much higher rates of inflation in the Euro-region, then we're getting a flush tomorrow - ALL RED. We've already seen that in ME markets, now Asian markets well down, and US futures aren't looking too good either. Everything RED right now, except for PMs... it will be interesting to see how those and US bonds are reacting with a major sell off in equities when trading opens.

On another note. .. I was at a party with some young people today. Most were in their twenties. Some get what's going on and their respective female partners would rather die than live in a world like 'The Road' or 'The Book of Eli'. Can't say that I blame them. The other couples want to see the world continue on as it is (on a crash course of planetary destruction) if only wishfully thinking. Most have given up on American politics and some are starting to get world banking ie; capitalism... Perhaps the market tanking 500 points very recently gave them reason to ponder. In the older crowd some are retiring and looking forward to staying home and collecting their pensions after 40 years on the job. I did not express my opinion to let them know that their money may not be there for them due to world indebtedness. Why spoil the party?

Stoneleigh very succinctly cast the issue for me last November, in just four words. Corruption is the system.

The system obviously cannot clean itself because almost everyone in the system would have to go to jail. So what will happen is that the system will continue spreading its socially necrotic infection across the society until it finally renders it too crippled to function. As society crumbles so will the system. It will shrink and reorganize and cower in seclusion.

If extinction doesn't overtake our kind first, then someday a new system designed to rob the people will take root and begin to grow. It won't end well either. They never have and apparently never will. Ya gotta ask yourself this. Why would anyone empowered to design a civil system not design it to rob the people? What do you think such people are, saints? Not a chance.

Here are some more memorable words that tell the tale.We know of no country where the ruling class does not run things for their own benefit.-- Plato

We humans are what we are and change seems to come very slowly. We have done this dance with the devil in the pale moonlight many times all over the world. For the sake of our descendants, we should hope that this time is not the last dance. Those who believe the dance can be avoided do not understand humanity or the art of the dance. Corruption is pirouetting toward its climactic leap. Just as it always does.

To be human is to be subject to the three poisons of greed, hatred, and delusion; all three are products of the untamed mind.

A calm, open, and tamed mind, steeped in wisdom and compassion is also possible. The problem is that such a mind is cultivated in-and arises in-the individual. Rarely have cultures valued this highly-individual work such that it becomes the norm, guiding and shaping economic or political life.

""The problem is that such a mind is cultivated in-and arises in-the individual.""

The problem is such a mind is bad for the economy. Period. Our culture does not like self-examination - so delusion is needed for continuance. The last time cultural introspection was done, on a mass-scale, a counter-culture flared up. That put an end it that type of thing

>>IMO your assertion would make more sense if the "overlords" were trying to crash the USD via HI, as many of the NWO theorists argue.<<

I don't get it - the "overlords" own the dollars, why would they collapse their own wealth? Why bail out the debtors with HI? I completely disagree that bailing out debtors and eliminating their dollar wealth is good for the "overlords."

HI **after** they deflate and bust everyone does balance their books, though, so I expect it then. As TAE states, though, you gotta make it through the deflationary bust first.

>>Obama is just a puppet of the evil global "socialists" who are ready to implement a new IMF-sponsored global currency, and what not.<<

Anyone stating Obama is a "socialist" isn't paying attention. I do believe that they will try to create a world financial system simply because they state they will. Will a global currency be a part of it? It could be.

>>If they want to transfer wealth via deflation, on the other hand, then it would be rather foolish to downgrade US debt. Just stop massive intervention by Congress and the Fed, and you get massive deflation.<<

Ahhh, but then the wrath of the people is focused on who? The Fed and Congress. They need "other events" that "force" them into austerity.

Rising rates that "force" spending contraction are "other events" that can be used as cover. Not to mention BFC and their front mega corporations are sitting on trillions and trillions and trillions in cash.

>>If Obama and Bernanke are in your pocket, planned austerity isn't a problem.<<

They want cover. They are tyrants, but tyrants lose big when people actually identify them as such. Especially a mass of people.

>>The China/India explanation by DBS makes the most sense to me right now (at least certain factions of those countries),<<

There may well be other issues that work to BFC advantages and probably some down sides too, but I don't think anyone can argue the ratings agencies aren't BFC controlled propaganda apparatuses.

Rating trash AAA and not downgrading the US years and years ago - when a decrease could actually cause substantial change.

Absolutely. And we know that economics defines the system in which we live - that's why people do what they do.

WHO controls the economics? Who controls the mega-institutions that guides society, sometimes criminally?

Big Finance Capital - the Masters of the Economic Universe.

BTW, while getting my behind kicked by kid in Monopoly, it dawned on me that the game could be adapted in a simple way in order to educate people how the debt-dollar tyranny siphons off money from society.

If you have 4 players, take 10% of everyone's money every 4th time GO! is passed. Put the money in a BFC pot and pull a "Federal Reserve" card.

You'd have to create the Federal Reserve Cards. They would say things such as...

"Stock prices have reached what looks like a permanently high plateau."~Fisher

"We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though."~Bernanke

"It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions."~Bernanke

"We will not have any more crashes in our time."~John Maynard Keynes in 1927

"There will be no interruption of our permanent prosperity."~Myron E. Forbes

"This crash is not going to have much effect on business."~Arthur Reynolds

(June 10, 2008) "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."~Bernanke

"This is far and away the strongest global economy I've seen in my business lifetime." ~Paulson

“There’s no chance the US will lose top credit rating.”~Geithner

I'm sure you guys/gals could think of many more to add.

At the end of the game, see if anyone can beat the Federal Reserve pot - and remember, they didn't even have to play the game to collect their rent on the system.

I was underwhelmed with Weston's piece in the NY Times though I will admit he writes exceedingly well. And his heart is in the right place. But he doesn't have a clue, and Vanna won't sell him a vowel. He is a disappointed progressive, apparently so Keynesian that he could even make Krugman blush beneath that Nobel beard, and a demoralized foot soldier in the Democratic Party. Obama was a made man as they say among the goodfellas before he was ever allowed seriously to challenge Hillary. Speaking of Hillary - how you like them apples? Zero to war criminal in 2.5 years - even a Porsche can't do that. But this is as good as it gets, as good as it can get, in the toilet paper of record.

IMN

Can't agree with you that this type of corruption is an indelible part of human nature. Depending on how you dice it, modern humans have been around for maybe 200,000 years and this kind of economic exploitative crap has only been going down for less than the last 5%, with the start of the agricultural city state.

A quote from my American patriot hero, David Rockefeller, from his recent Memoirs.

For more than a century ideological extremists at either end of the political spectrum have seized upon well-publicized incidents such as my encounter with Castro to attack the Rockefeller family for the inordinate influence they claim we wield over American political and economic institutions. Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as 'internationalists' and of conspiring with others around the world to build a more integrated global political and economic structure--one world, if you will. If that's the charge, I stand guilty, and I am proud of it.

The only thing you can be sure of in the "market" today is tremendous volatility. TPTB do their best to rig it, but it may or may not be spinning out of control right now, and we are never sure of their game plan anyway. Mirrors in mirrors -welcome to the fun house. Just sit back with your beer, popcorn, and Depends and watch it unfold in living color and try to connect the dots.

You have a point. Who cares about a conspiracy to eventually create the biggest credit bubble and bust operation in human history, contrary to black letter law, and the billions who will suffer because of the actions of these conspirators?